THE BANKING CRISIS.

New Zealand Mail, Issue 1108, 26 May 1893, Page 21

THE BANKING CRISIS.

Another bank suspension, the fourteenth, draws further attention to the value of the principle of reconstruction. What that principle is doing for the present we have shown. We have still to consider its future effect. In the future the immediate efFeci will be to give banks the additional status of loan companies, at least for some time. The mistake of the past,for which so many banks are suffering, is that bankers added to their ordinary banking business the business of loan companies without securing the basis on which loan companies work. The reason for that error is of course obvious. The chief resource of British banking, viz, the keeping of large amounts immediately liquidable in Government bonds, and the stocks of railway. and other companies, was not open in the beginning to colonial banking, for the obvious reason that the colonies are not the centre of the world's money market. In the colonies there is no money market. For that reason the colonial banker doing business in a country of first production had to lock up for indefinite periods more of his resources than is the case in British banking. In the beginning the British theoretical margin of absolute safety, viz., a stock of coin and bullion in the proportion of one-fifth to the liabilities, was h on account of the larger colonial proportion of locked-up assets such as foil short of the requirements of safety. As time wore on this condition of unsafety grew worse. The colonial public made money faster than investment could be found, and money accumulated at the great financial centres of the world in hands eager for outlet. The colonial banker thus pressed on one side to employ money, saw on the other the exceptionally good business of develop- , ing young countries of good re- I sources. He thus increased enormously the proportion of his deposit money. That increase made the one-fifth margin enormously more unreliable than it wa°3 in the beginning. But the colonial banker continued to rely upon it—it was quoted by the Banking and Insurance Record as the highest margin of safety in the world in March last—until the fall of a dozen banks in six weeks exploded it into space. The colonial banker with the practical sagacity that distinguishes him, has found under the guise of reconstruction a more safe condition of things. Reconstruction asks depositors and shareholders to admit that a mistake of principle has been made, and to take the consequences, the former by letting their money lie, the others by paying up whatever may be necessary to restore equilibrium by meeting shrinkage I

with cash payments. In that situation there is no cause for uneasiness. The crisis is universally understood, and a remedial course universally accepted. Whether ther6 are more bank suspensions, matters nothing. The dominating fact is that the acceleration given to the progress of a vicious system of banking has brought it to a sudden standstill, without breaking the fabric of commercial stability to pieces. That is the great reassuring feature of the situation. As for the question as to which class of banks, the survivors or the reconstructs, will be the strongest, that fades into nothing in the light of the fact that when the reconstructions are over the great majority of depositors in Australian banks will have agreed to lock up their moneys for periods varying between five and ten years. Moreover, there are several banks (whose chiefs discerned the true principle from the first) which have for years been transacting business on the very lines of the proposed reconstructions. They have large sums on deposit for long periods, which they lend on the same lines. They lend, in fact, only on the lines on which they borrow. They borrow on long lines and short lines, and they can afford to lend on both. The banks undergoing reconstruction have essayed the task of borrowing on short lines and lending too much on long lines. Their procedure was, without doubt, illegitimate banking, and has come to grief. Whether the other procedure may or may not be called legitimate banking is a question we need not discuss now. But there can be no doubt that it is safe business. Reconstruction will place the suspended banks on the same footing. The crisis will, however, force to the front the question of whether it is advisable to lock np money for long periods by extending the . area of banking responsibility. The Bank of New Zealand faced this identical question when it was in trouble, and settled it by separating its land assets from its banking business, obtaining time for the realisation of the former. That question will be before the reconstructed banks, and perhaps pressingly, as soon as they are once more launched. Reconstruction, having saved the position, is paving the way for gradual realisation.