BANK POLICY IN CRISIS

Poverty Bay Herald, Volume LXIII, Issue 18991, 16 April 1936, Page 9

BANK POLICY IN CRISIS

BAN ON SPENDING ASSISTANCE TO COUNTRY CONTROL OP ADVANCES SYDNEY, April 9. The policy adopted by the Bank of New South Wales to meet the onset of the depression whs disclosed to the Banking Commission to-day by Mr. A. C. Davidson, general manager, who produced a confidential letter sent by the bank to its inspectors on October 21, 1020. This letter stated, inter alia:— ". . . our advances are running at a much higher proportion to our deposits than Ave like to see at this time of the year. ... On the 'one hand, we do not wish to stop advancing altogether, while on the •other hand we 'wish to be able to see oiif'own customers through their difficulties as far as possible. "Will you please giye a closer and more detailed oversight to the advances in your division, giving a stricter supervision to advances of such a nature that they are not applied to objects which will Ibe of assistance to the national welfare in the present, time of depression so that we may be able to lend a greater support to those activities which shall soonest promote our recovery. "The demand for moneys for such purposes as land speculation, building projects which are not absolutely necessary, the replacing of a modest home by a protentious one, lavish expenditure upon places of amusement, etc., advances to support speculations in stocks and shares are merely a few of many objects which

are not entitled to assistance in tl present depression. "... Wo do 'not want; any drast or unreasoning compliance with th policy, but if wo all pull togeth( along these lines the position wi slowly rectify itself without inereu; ing lite hardship which the communit as n whole will have to undergo." 1P27 WARNINGS Professor Mills had asked whethe any letters indicating the bank' •policy were sent in adininistrativ officers and managers prior to 1929. Air. Davidson produced letters dat ing back to the beginning of 192 i asking ofileers to exercise a carel'u ' supervision over the bank's advanc business, and to restriel advances. One letter, written in .Inly, 1927 stated: —"Deposits For several reason i have not shown the buoyancy tin ■ year that I hey have exhibited for : ■ number of years vast, while advance have greatly increased, and this treru of affairs must not 'be allowed to con tinue." Another letter, in Angus!-, 1927 ' stated:—"We do not at. present wisl 1 our advances to increase—quite th( ' reverse, and all applications of im portance must first be snbtnittec here, . . . 'fry also to arrange t< reduce limits where they are fuFot than required. Constituents cannot expect its, in the present condition oi tin mev market, to keep available limits that they are not likely to usi when we are obliged to refuse accommodation to others for pressio<; needs." Mr. Davidson' was asked what per centngc of his bank's advances was not readily realisable. He replied that it was almost impossible to give a satisfactory answer, It depended so much on circumstances, In prosperous times an advance might be realisable through the borrowei being able to sell his asset, and also through some other bank being prepared to take over the advance. In depression the percentage of advances not readily realisable increased greatly. The policy of Australian trading banks in depression had 'been to do everything possible to maintain their borrowing customers in their businesses. FIRST, THE MAX Mr. Chifley: What reduction in its advance rate did vour bank make in 19.11 ? Mr. Davidson: The reduction was -22 s 9d per cent, and the year before we had made a substantial reduction of nearly 10s per cent. By September, 1931, we had made reductions' totalling almost .I.ls per cent. By the end of the year the reduction in our advance rate had reached over ,€2 per cent. Later, Mr. Davidson pointed out that it was essential to it banking system to use the interest rate as one means of discriminating between the enterprise which hold the promise of being sound and profitable to the community and the enterprise which did not fall within that category. "The first consideration in granting every advance is the personal character and. ability of the applicant, together with his knowledge, experience, and capacity for the particular enterprise for which' the money is required," said Mr. Davidson. Mr. Chifley: Is not the asset the first consideration, and the man himself a. secondary consideration? Mr. Davidson: No; the asset is the last thing the bank considers. -Mr. Chifley: You consider the man more important; than his assets? Mr. Davidson: The man come: first, the purpose for which he want; the advance conies second, and the asset conies absolutely last. Mr. Justice Napier (dryly): Yel the asset is by no means a negligible co.isideration ! Mr. Davidson: If yon pick the right man the asset is almost a negligible consideration. Because if' I lie nut-: is the right kind ho will be sure to pull through in ordinary circumstances. LONU-TLTIM CAPITAL , Asked how far authority to make advances was delegated in the bank, Mr. Davidson stated that then' was no general rule. Practical admitiis tartioil of the bank's credit policy had to lit' a compromise. Centralist! lion was needed so that the various assets ami liabilities of the batik might be under proper control. For practical purposes," however, it was essentia! that decentralisation should be carried as far as possible. The extent .to which lite authority wits delegated depended upon the individual capacity, knowledge, experience and position of the officer. Mr. Justice Napier: Do you engage in long-term lending for industry? Mr. Davidson: In theory, our loans may be •(•tilled up at any time, but in practice they do become long-term loans to the extent that, if a borrower is sound, his Joan is allowed to stand at times for many years, unless he himself" .wishes to pay it off. The Australian banks have provided long-term capital in this manner because they have appreciated that the conditions obtaining in a young country would create a demand for longterm capital. The development of industries could not otherwise have been so rapid. Air. Justice Napier: Do you consider that tjiere is any need for additional .facilities for' the long-term lending to industry.' Mr. Davidson: No. This is well provided by the trading banks, private investors and through the Stock Exchange. A great deal in the way of comparatively small amounts of longterm capital is also provided by life assurance companies, savings banks and building societies. This concluded Mr. Davidson's evidence.