XVII Bank Supervision in Relation to Bank Credit

CHAPTER XVII BANK SUPERVISION IN RELATION TO BANK CEEDIT The most valuable service of a bank examiner has to do with his wholesome influence on the quality and volume of the loans of the institutions supervised. By enabling banks under his jurisdiction to avoid unsafe and dangerous loans the examiner renders a valuable service not only to the banks concerned but also to the business community as a whole. In so far as he tends to keep the crucial ratio of reserve to deposits safe and within the limits of prudence he checks general overexpansion of bank credit. To the extent that he prevents and reduces loans extended to unsound credit risks, he promotes an equitable distribution of available funds among the most efficient and worthy borrowers. In safeguarding the quality of bank loans the examiner is an increasingly important and welcome ally of the bank credit man. Bank examinations in the United States are either "external" or "internal." External examinations have their inception in agencies outside the bank such as the national or state governments or clearing house associations. They are precautionary and protective measures designed to minimize, if not wholly to prevent, banking practices and conditions inimical to the interests of the public in general or groups of banks in particular. The object of external examinations, 305 296 BANK CREDIT like the initiative taken, is public or quasi-public in character. Internal examinations, on the contrary, are private in nature and restricted in scope to the work and condition of the institution examined. The purpose of an internal examination is to correct and eliminate practices that run counter to the interests of the shareholders of the bank affected. Internal examinations are exemplified by those conducted by bank directors and those by public accountants employed directly by banking institutions.

Examinations in most leading countries such as England, Scotland, Germany, France, and Canada, are internal; in the United States prevailingly, but not exclusively, external. In our own country, with its decentralized banking system, developments in recent years in connection with bank examination and supervision have had striking and pronounced effects upon the distribution of credit extended by banks to their borrowing customers. It will be convenient to consider first the supervision of national banks in relation to the quality and distribution of their loans. National Bank Supervision Thanks to the energetic and constructive efforts of the Comptrollers of the currency and to statutory changes, a transformation in the methods and effectiveness of national bank supervision was made during the decade following the crisis of 1907. Previously examiners, inadequate in number, compensated on a fee basis, and drawn in many cases from the ranks of those without actual accounting experience, did their work hurriedly, inefficiently and without special BANK SUPERVISION 297 reference to the soundness and liquidity of bank loans.

Examiners had for years worked in the same district, conferred with nobody, each following his own methods, which were often faulty and crude, knowing very little of borrowers' standings and the value of securities. The pooling of credit information as well as cooperation in other forms among the examiners themselves and between the examiners and the Comptroller's office was almost entirely lacking. The need of such cooperation had clearly developed. In the reorganization of the service by Comptroller Murray subsequently to the panic of 1907 the country was divided into eleven districts; one of the very best examiners in the work being named as chairman of each district, and the examiners of each district being required to attend a joint meeting in their district at least twice a year. The meetings not only afford opportunity for the discussion of such matters as the adoption of new forms and blanks, good and bad banking practices, good and bad bankers, but are clearing houses for the exchange of credit information.

Reports are rendered at the meetings by each examiner on every bank in his district which he regards as in an unsound condition. From all the reports of the individual examiners the chairman makes up a final report, copies of which are mailed to the Comptroller and to each of the other district chairmen for their information and for the information of examiners in other districts. A credit bureau has been built up in the Comptroller's office on the basis of facts submitted in the 298 BANK CREDIT reports made by the district chairman. Furthermore, as a copy of the report of each chairman is sent to each of the other chairmen, and as the reports are accessible to the individual examiners, it is possible for any examiner who is interested in any particular line of credit to find out through his chairman what the other ten chairmen know about the subject of his inquiry.1 Another improvement in the national examining service was the appointment of a number of examiners at large. The time of these special examiners has been devoted largely to banks which had been under severe criticism for years, the regular examiner being unable to cope with them, either because of lack of time or lack of force of character. This class of banks, given to chronic disorder, has been put into satisfactory condition.

The examiners at large have another and equally important function. Going all over the United States, examining banks in different districts, they are required to report to the Comptroller whether the regular examiners are doing their work carefully and satisfactorily. They are not only examiners of banks which most imperatively call for tactful and thorough treatment but are also supervisors of the ordinary examiners.2 The general relations of examiners to banks are now quite satisfactory. Examiners are no longer permitted to borrow from national banks; to own stock in a 1 Lawrence O. Murray, Some Problems of the Comptroller's Office, Proceedings, Thirty Fifth Annual Convention, American Bankers' Association, 1909, p. 165. 'Ibid., p. 170.

BANK SUPERVISION 299 national bank; to serve as officers or directors of any corporations which borrow from a national bank; to engage in any business except examining banks.1 The modifications of the methods and machinery of national bank supervision introduced under the direction of the Comptroller of the Currency have been supplemented by improvements provided for by the Federal Reserve Act. That statute placed national bank examiners on a salary basis of compensation, insuring examination more nearly adequate and equal to the actual and varying requirements of institutions of whatever size and condition. It is, however, not the invariable testimony of bankers that the operation of the provisions of the act of 1913 relating to bank supervision has resulted in greater effort and success on the part of examiners to tone up the character of the contents of the note case. Politics, bankers contend, bring into the examining service individuals who, good party men that they may be, are inefficient as auditors and appraisers.

State Bank Supervision in Relation to Bank Loans Improvement in the work of bank examination carried on by the states has been scarcely less marked than that under the control of the Comptroller of the Currency. It would carry us too far afield to give a detailed description of the work of the progress made by the various states,—but instead we may well indicate what has been done in an exemplary manner by one or two of the leading states, notably New York, by way of 1 Ibid., p. 166.

300 BANK CREDIT purging the contents of the banks' portfolios of inferior and worthless paper. The supervision of New York State banks is serving as a guide to the banking departments of other states and deserves attention because of the numerous and important measures that have been taken to raise the quality of bank loans. We may mention first the establishment in 1911 of a credit bureau.1 A record is there kept of borrowers of large amounts in state institutions, of group loans, persons borrowing through the use of corporate title and trade names in order to secure "extra" accommodation, of dummy borrowers, of bank stock hypothecations,—hypothecations that indicate whether the stock is lodged in strong or weak hands and if the control of the institution is carried on borrowed money. The credit bureau furnishes the banking department a check on irresponsible borrowers and on the activities of ambitious promoters who purchase control of banks in order to obtain additional facilities to further their own speculations. But the principal work of the credit bureau is the investigation of over-extended borrowers, who, employing false statements, secure accommodation from a number of institutions, each institution making a loan upon the assumption that there are no other lending banks involved. One case was found in which the borrower maintained accounts in twentynine banks, and one individual was discovered borrowing in the name of thirty individuals and corporations.

The banking department of New York State is able upon request to furnish to banks under its supervision 1 Annual Report of the Superintendent of Banks, New York, 1912, p. 8. Same for 1915, p. 16; for 1916, pp. 15, 16.

BANK SUPERVISION 301 the total of a borrower's bank loans and the number of State institutions lending to the borrower, without, of course, disclosing the names of the lending banks.1 The State bank department of Indiana also keeps a record of all loans in excess of $2,500; which includes paper bought of brokers. The benefit to the banks of this credit information is illustrated by the case of a manufacturing company that sold $134,000 of commercial paper to Indiana banks. The department felt, after investigation, that the amount was excessive, and the banks were informed, upon inquiry, of the total amount borrowed. Within a few months when the company went into the hands of a receiver the concern owed the banks only $40,000 and hah* of that amount was additionally secured.2 Another movement in the direction of improving the loans of New York State banks is the simultaneous examination, in cooperation with the Federal examiners, of all the banks in a given district. The principal object of the simultaneous examinations is to obtain the best possible information concerning borrowers that is available for the credit files of the banking department. The best information cannot readily be secured when the banks are examined separately and at different periods of time.3 Cooperation between state and federal examiners, á., 1912, pp. 8-10.

2W. H. O'Brien, Observations on Bank Examinations, Proceedings, Sixteenth Annual Convention, Indiana Bankers' Association, 1912, p. 177. 'Annual Report of the Superintendent of Banks, New York, 1913, p. 11.

302 BANK CREDIT begun in 1908, is now the rule. A conference of the examiners after the examination tends to bring to light the true condition of the affairs of the banks through an exchange of credit and other information.1 Clearing house bank examiners are also cooperating with both state and federal authorities, this cooperation taking the form chiefly of attempting to discover and repress "double" and "multiple" borrowers. Clearing House Bank Examination in Relation to the Quality of Bank Loans Clearing house examinations, wherever introduced and efficiently administered can and will by their restraining influence reduce the evils of bad judgment and dishonesty to a minimum and effectually prevent any general condition of unsoundness or of bad banking, just as certainly as modern sanitation, isolation and health inspection may be depended upon to prevent the serious spread of contagious diseases. An occasional death may occur, but there can be no epidemic.2 What is clearing house bank examination? Where is it in operation and in what ways does its operation affect the quality of the paper which the borrower gives in exchange for the credit of his bank?

In 1906 the clearing house banks of Chicago, for the good of Chicago banking, assumed the liabilities 1 Lawrence 0. Murray, Some Problems of the Comptroller's Office, Proceedings, Thirty Fifth Annual Convention, American Bankers' Association, 1909, p. 170. 1 Joseph G. Talbert, Proceedings, Eighteenth Annual Convention, New York State Bankers' Association, 1911, p. 48.

BANK SUPERVISION 303 of three failed banks,—the Walsh banks,—a national bank, a savings bank, and a trust company, which had been forced to close their doors on account of mismanagement and misplaced loans. At this juncture a system of bank examination under the direct and close supervision of an examiner and a corps of assistants chosen by the Chicago Clearing House Association was conceived and, to the surprise of its originator, approved by the association and quickly put into operation. From Chicago the idea has spread to Minneapolis, St. Paul and a score of other leading cities.1 Chicago, as has been true of other cities adopting the idea, has followed the policy of giving the examiner a large measure of freedom of action, unhampered by hard and fast rules and arbitrary instructions. Whether in Chicago, Los Angeles, Cleveland, St. Louis, or New York, the nature of the examination is substantially the same. A thorough understanding of the influence of clearing house bank examination upon the quality of the basic elements of security underlying bank loans will be facilitated by a brief description of the method followed by the clearing examiner in the performance of his work. The account that follows, although it pertains directly to the practice in St.

Louis, may be regarded as typical. 1 In 1916 the banks of the following cities were under supervision of clearing house bank examiners:—New York, Chicago, Philadelphia, St. Louis, Cleveland, Kansas City, New Orleans, Los Angeles, Milwaukee, Louisville, Minneapolis, St. Paul, Columbus, 0., Nashville, Spokane, Portland, Ore., Oklahoma City, Muskogee, Okla., St. Joseph, Mo. Proceedings, Forty Second Annual Convention American Bankers' Association, 1916, p. 495.

304 BANK CREDIT The System Described Without notice and of his own volition, the examiner, with his assistants, enters a bank or trust company and begins the examination. To both the books and information of officers and employees he has free access. Having completed the examination he makes duplicate reports, which contain all the essential facts obtained in the investigation. The amount of the cash of the bank, of its past due paper, of excessive loans, of its bad debts, if any, the amount due by the directors as payers, endorsers or guarantors, the amount due by corporations in which directors are interested, the value and book valuation of the bonds carried, whether or not capital, surplus, and undivided profits are represented by good assets,—these items and facts are set forth in the examiner's report, one copy of which is delivered by the examiner to the president of the institution examined. Each director of that institution is notified by mail that the examiner's report is in the hands of the president of the institution in question. A written request is made by the examiner that the director notify the examiner in writing of the receipt of the notice. If necessary a second notice, or a third, is sent. The purpose is to establish the fact that every director of every institution which is a member of or connected with the St. Louis Clearing House is informed of the condition of his institution as disclosed by the clearing house bank examiner.

If the examination reveals nothing indicating bad management or unsafe condition, the chairman of BANK SUPERVISION 305 the Committee of Management of the clearing house is so notified and the duplicate report is placed in the examiner's files. Under such condition the report is seen by no one except the officers and directors of the examined bank or trust company. If on the other hand the examiner finds conditions different from the case just stated, he submits a report to the Committee of Management. The committee then requests the bank management to correct conditions under penalty of having the institution suspended from the clearing house until a meeting of the clearing house association has been called and the whole matter placed in detail before it. Conditions are almost invariably corrected with celerity.1 In the work of the clearing house examiner, in distinction from that of state and national examiners, chief emphasis is placed on improving the quality of the bank loans or of preventing deterioration in that quality. Banks in thoroughly sound condition are passed quickly by; those showing signs of precarious condition are examined frequently in order that they may be built up and their condition improved.2 Government authorities, national or state, may interfere only when conditions become so bad that the capital of the bank is unpaired or its solvency ques1W. H. Lee, Clearing House Bank Examinations, an address delivered before the Missouri Bankers' Association, St. Louis, Mo., May 18, 1910, pp. 6-8. (Published by the St. Louis Clearing House Association.) 2 John W. Wilson, The Work of the Clearing House Examiner, Proceedings, Thirty Seventh Annual Convention, American Bankers' Association, 1911, p. 707.

306 BANK CREDIT tioned. The clearing house interferes if only the statement of condition returned to the Comptroller of the Currency or to the state banking authorities, as the case may be, does not show a true condition of existing affairs as discovered and reported upon by the local examiner.1 Mr. J. B. Forgan, formerly president of the First National Bank of Chicago, and a close observer of the working of the clearing house system of examinations, says:— Our methods insure the stirring up and elimination of the sediment which is liable to accumulate in the banks. I am in the habit of classifying bank assets in dairy terms, such as cream, sweet milk, skim milk, sour milk and sediment. In the bank, as in the dairy, the sediment falls to the bottom, where it remains out of sight and out of mind unless constant vigilance is exercised in its elimination. If a bank's management is weak the cream is liable to be skimmed off the top, while the sediment accumulates at the bottom, and gradually its assets become so permeated with it that they form a putrid mass of curds only fit for the dump pile of a receivership. Clearing house examinations tend to the healthful conservation of the sweet milk and cream and to the elimination of the sour milk and sediment.2 Supervision by a local examiner thoroughly familiar with the condition of the institutions with which he has to do is highly valuable also in quite another respect, viz., in protecting sound banks against unjusti1 J. B. Forgan, Clearing House Examinations by Clearing House Examiners, Proceedings, Thirty Sixth Annual Convention, American Bankers' Association, 1910, pp. 689, 690.

»Ibid., p. 690.

BANK SUPERVISION 307 fiable assaults, and delicate credit situations against unfavorable influences. Mr. Ralph Van Vechten, an ardent champion of clearing house bank examination, illustrates the efficacy of the system in this connection. During one of the recent stringencies one of the smaller banks was being talked about. The bank was perfectly sound. But this talk reached a bonding company which was on the bank's bond for city deposits. The bonding company sent out word to its representatives to withdraw from that bond. You know what would have been the result of such a withdrawal at such a time. Mind you, this was during a severe stringency. The representative of the bonding company came to me and asked me my advice about it, and I asked him the names of his directors, his local directors, and he submitted them and I said, "You go to this man," who was president of one of the banks. He went to this local director and said, "Will you recommend that this bond be continued?" The answer was, "I will recommend that the bond be continued if the clearing house examiner will tell me that the bank is sound." He called up the examiner over the telephone and the examiner said that the bank was absolutely sound. The director immediately telephoned to the New York office of the company and the bond was continued.

Now, things of that kind are mentioned as an illustration of the possibilities of the system and its benefits. Those things are coming up all the time.1 The work of the clearing house examiner is complementary to that of national and state examiners. He is intimately acquainted with the conditions prevailing in his locality. In fact, he lives in the locality where 1 Ralph Van Vechten, Proceedings, Forty First Annual Convention, American Bankers' Association, Seattle, 1916, p. 501.

308 BANK CREDIT he works. He knows much more intimately than it is possible for examiners presiding over larger territory to know, not only the accounts of the business men but also their personal history, methods and character. One of the chief and distinctive merits of clearing house bank supervision lies in the fact that the examiner, unlike the federal and state examiners, reports his findings directly to the individual directors who are his employers. It is one thing to write a report to a distant federal or state officer who does not know whether the report represents accurately the condition of the bank examined; it is quite a different thing to frame a report for the use of the officers and directors of the institution itself, who know more about its condition and intimate affairs than the examiner can reasonably hope to know. His work must be so searching and thorough as to beget continued confidence.

It is the opinion of an examiner with experience in both national and clearing house service that it is the necessity of the detailed report to the directors themselves that is the greatest insurance of careful and efficient work on the part of the examiner.1 Cooperation among clearing house, state, and national examining authorities would render it easy to ascertain the amount of doubtful and worthless loans and other assets in any bank, effectually to eliminate them, and prevent their being shifted from one institution to another. There should be, however, no objection to the clearing house examiner divulging infor1 Francis Coates, Jr., What Effect wiU the Federal Reserve Act ham on Clearing House Examinations, Proceedings, Fortieth Annual Convention, American Bankers' Association, 1914, p. 492.

BANK SUPERVISION 309 illation received by him in his own work as the state and'national examiners have it within their power to acquire this information for themselves.1 The highest degree of usefulness and success of bank examination under the auspices of clearing house associations will be attained only through full cooperation with national and state systems of supervision, since any single clearing house system of supervision cannot safely be extended beyond limited bounds without a loss in the distinctive advantages flowing from intensive and localized work and study. The Los Angeles system has, at their request, been extended so as to include thirty-six banks outside the city, and within this "outer zone" of twenty miles from Los Angeles it would be difficult for a bank to close its doors. Outlying banks near Chicago also have come under the supervision of the clearing house examiner of that city.2 Beyond such limits the system would likely lose progressively in efficiency.

Influence upon Loans of Small Banks The clearing house system of examinations through provision for pooling the credit information of the banks of a given locality as well as information relating to collateral has been of signal value in raising the quality of both secured and unsecured loans, par1H. M. Zimmerman, Cooperation between Clearing House Association and State Banking Department, Proceedings, Thirty Seventh Annual Convention, American Bankers' Association, 1911, pp. 693, 694. 1 Proceedings, Forty First Annual Convention, American Bank' ere' Association, Seattle, 1915, pp. 515, 516.

310 BANK CREDIT ticularly of the smaller banks. In Los Angeles nine tenths of the knowledge obtained regarding collateral stocks of known value came from the larger banks; nine tenths of the stocks of unknown value used as collateral were found in the smaller banks. Some of the details of the way in which information is pooled and handled may well be indicated. After each examination the names of all borrowers of $1,000 and over, let us say, are listed on a card system. After all the banks have been examined once, the cards begin to mean something. Some names may show heavy borrowings at several banks. The card is before the examiner and bears the name of the borrowing individual or concern, the name of the lending bank, the collateral, if any, the amount of the loan, the commercial rating, and the last financial statement condensed. The card may show numerous loans at as many banks. Each separate loan is considered; those with satisfactory collateral being passed over quickly.

The unsecured loans are then decided upon. Let us suppose Brown is found with numerous borrowings. The card says he is worth $200,000 and has borrowed $100,000 without security from each of five banks. Every lending bank is consulted regarding Brown, his business, integrity, mode of life, etc. The interested banks are notified of Brown's borrowings, and asked if in their opinion the credit extended is warranted. With the information in his possession each banker is allowed to use his own judgment as to calling the loan, demanding security or allowing it to stand. The cards also contain such expressions as no good, liar, slow pay, moral risk, bad. A very careful study and BANK SUPERVISION 311 analysis of the cards serves to bring weak borrowers to the surface. Sometimes the banks are requested by way of a friendly hint to have a given note secured by acceptable collateral or call the loan. The banks know of the information in the possession of the examiner and make many inquiries concerning the standing of firms and individuals and the value of collateral.

Inasmuch as the greater number of inquiries comes from the smaller banks and the information filed in the examiner's office is free for the asking, it becomes evident at once that small banks are elevated to a position where they, too, can learn of poor risks and poor collateral before loans are made.1 Small banks before the installation of examination under local authority providing for the pooling of credit information may have been getting a large proportion of the loan rejections of other and larger banks with superior credit information facilities. To such small banks the establishment of a system of supervision providing for a free interchange of credit information proves a great boon.2 All banks, whether large or small, are relieved of the necessity of relying on "street" information. Effects upon Loans to " Double " Borrowers in Large Cities In our large cities, particularly, there are very many accounts that are common to nearly all the `John W. Wilson, The Work of the Clearing House Examiner, Proceedings, Thirty Seventh Annual Convention, The American Bankers' Association, 1911, pp. 707, 708.

"Ibid., pp. 723, 724.

312 BANK CREDIT banks of those cities. Lines of credit of a local nature but of vast importance in the particular community are under no control except through the clearing house supervision of banks. If a given bank desires to ascertain whether a certain concern is expanding too fast, whether it is using too much credit, the clearing house examiner upon request gives the bank total loans outstanding of the concern in question, without, of course, disclosing the name of any bank involved,1 placing the bank in a way to check or curtail or cut off the loans of the concern,—to lock the door before the horse is stolen. The "duplicated" borrowers' file built up by the examiner at Cleveland, contained "some thirtyfive hundred names" in 1914.2 Incidental Effects upon Loans One of the most valuable, if minor, features of the system of examination under discussion is that the detailed report of the examiner which is brought forcibly to the attention of each of the directors, as already explained, causes directors to know a great deal more about the affairs of the bank than they would otherwise.

Even the members of the executive committee of the bank, who are very familiar with its work, are familiarized with details of securities or loans that might not come to their knowledge either through absence from meetings or through inadvertence or failure of officers to make reports.3 1 Ralph Van Vechten, Proceedings, Forty First Annual Convention, American Bankers' Association, Seattle, 1915, pp. 500, 501. 2 Francis Coates, Jr., op. cit., p. 490. »Ralph Van Vechten, op. cit., p. 500.

BANK SUPERVISION 313 Clearing house examination has been at once a powerful corrective of weak loans already made and a positive deterrent to the further accumulation of similar paper. The dread of a report from the clearing house examiner has been sufficiently strong to make banks extremely careful as to the bills they put into their portfolios. Then the system furnishes a very good excuse to bankers to state to the applicant for a loan which it is felt preferable not to grant that it is not the kind of a loan which the clearing house examiner would look upon with favor.1 By way of contrast another function performed by the clearing house examiner is worth noting. In certain cases where the policy of the institution is to handle only the highest class of business, the examiner may not think it amiss to try to impress upon the officers and directors the desirability of adopting a more liberal policy in order to justify the existence of the bank as a useful factor in the community by aiding more generously meritorious enterprises that come naturally within its range of operation.2 In other words, the loan standards of the banks are made more nearly uniform: those of a few being made more liberal; of many, less so.

Clearing house examination promotes not only the soundness of bank loans but also the equitable distribution of bank credit among borrowers. Finally, it is to be pointed out that clearing house *Sol Wexler, Proceedings, Thirty Sixth Annual Convention, American Bankers' Association, 1910, p. 665. 1 A. Kains, Clearing House Examination of Banks, Proceedings, Fifteenth Convention, California Bankers' Association, 1909, pp. 159,160.

314 BANK CREDIT examination of banks has resulted in the elimination of a great many institutions throughout the country which did not deserve to remain in the banking business. It has also brought about a more friendly feeling among banks, paving the way for consolidations, a circumstance which has led to a much more conservative and careful loan policy,1 with favorable resulting effect upon the quality of the portfolio contents. The fact that the commercial paper of the member banks in the Federal Reserve system has, since 1914, been employed in larger and larger volume as security underlying the Federal Reserve notes and deposits gives added significance to the inception and growth of clearing house examination of banks. As long as the Federal Reserve banks continue to rely chiefly upon the member banks to safeguard the quality of the paper which is rediscounted and subsequently used as the basis of note issues by the regional institutions the examination of banks under clearing house auspices will be a potent and salutary force affecting the elemental safety of the only elastic element in our monetary circulation. Not only does this now widespread form of bank supervision render the structure of business and finance less liable to the consuming fires of crisis and panic; it also improves and intensifies the means wherewith the conflagration, breaking out, may be controlled and extinguished.

The establishment of systems of clearing house bank examination by the leading clearing house associations in the United States during the decade following 1906 is a movement comparable in significance and 1 Sol Wexler, op. cü., pp. 664, 665.

BANK SUPERVISION 315 beneficial results to the establishment of credit departments by our leading banks. The use of the credit department and the advent of the independent examination of clearing house members have created a new era marked by higher standards imposed upon the sellers of commercial paper as well as the direct borrowers of banks. Internal Bank Examination Internal bank.examination may be by the board of directors of the bank concerned, or a committee of the board, by employees, or by an auditing company or chartered accountants. In all these cases except the first, however, the examination is likely to be in the nature of an audit with little attention given to appraising the contents of the note pouch. Examination by directors on the contrary naturally takes the form of evaluating assets,—where the busy directors have time and disposition. Directors are not likely to be well qualified as accountants to audit the books, but they are commonly able to pass excellent judgment on the paper held by their bank, and examinations by directors should be encouraged.

"When chartered accountants insist on invoking the help of the directors in appraising the loans and other investments, excellent results in the way of eliminating bad paper are easily within reach. Well informed directors supplement the work of chartered accountants at its weakest point, i. e., the inability of the accounting firms to pass intelligently upon the names of bank borrowers. Probably the most ambitious attempt of certified accountants to overcome the very patent weakness in 316 BANK CREDIT their work as bank examiners is represented by a NewYork firm, Marwick, Mitchell & Co., in its system of examination and exchange of credit information for Group 1 of the New Jersey Bankers' Association, consisting of the banks of Middlesex County, including such towns as New Brunswick, Perth Amboy, and South River. This firm of accountants has itself had charge for a period of years of securing and giving out credit information which pertains chiefly to facts ascertained from the banks of Group 1 concerning loans already extended. A bank desiring to learn the loans of other banks to a given applicant, inquire of the firm of accountants, stating at the same time the amount which the applicant owes the bank in question. The accountants, before replying, revise their files touching the borrower concerned by direct inquiry to all the banks in the group.

The plan also makes provision for a thorough examination by the accountants of the banks within the group. During the course of the examination the examiner meets with the board of directors or a committee of the same and together they go over the loans. Upon completion of the examination a full report is prepared by the examiner and delivered to the president of the bank. Space is provided upon which the directors are to sign their names after reading the report, which may include, if occasion require, brief recommendations concerning improvements in the system and records of the bank.1 1 Andrew A. Benton, New Jersey System of Group Bank Examinations, Proceedings, Eighth Annual Convention, New Jersey Bankers' Association, 1911, pp. 48, 49.

BANK SUPERVISION 317 It is a merit of the New Jersey plan that its adoption is an encouragement to borrowers to employ chartered accountants to certify to the statements submitted to bankers when application for accommodation is made. According to an officer of one of the leading banks concerned, this system has been very satisfactory and the credit bureau very beneficial. Of the various forms of internal examination of banks the future will probably witness the most marked development and spread of examination by directors. It is clearly recognized that the character of the loans and discounts is the crux and core of safe and profitable banking, and state legislators, particularly, are becoming conscious of the protective and purging value of examinations made by a bank's own directors. The Michigan banking law makes "it mandatory upon the directors of each State bank to appoint an examining committee from among their number, or from among the stockholders, to examine, every six months, the affairs of their respective banks, requiring the report of such examination to be spread upon the directors' records and forwarded to the Commissioner of the Banking Department. Anything tending to require greater diligence on the part of the directors hi the management of the banks under their control works for the betterment of the bank, making violations of the statutes less likely. Such examinations are a guarantee to the Department that the assets examined and verified by its examiners, are bona fide, and that their character is thoroughly understood by the directors.

This, in a large measure, corrects the difficulty heretofore experienced by the Department, in this, that the 318 BANK CREDIT examiner being unacquainted with local credit lines and securities was unable to ascertain and report the value of many of the assets of the bank examined."1 Our bank directors have it within their power greatly to improve the quality of American bank loans and investments. Conclusion Numerous as are the forms of examination, varied as are the jurisdictions, there is still an inadequacy of supervision, but an inadequacy of quality rather than quantity. Not until the national and state supervising agencies, cooperating with each other and with clearing house examiners, are able to cope on a large scale with excessive and multiple borrowing as effectively as have the clearing house examiners in our leading cities already done, can it be maintained that further reform and progress are not greatly to be desired. The extension of the work of the credit bureau as already well begun by states like New York and Indiana, the placing of the compensation of examiners on a salary basis, as has been done by Pennsylvania, Minnesota and the federal government, the elimination of politics from appointments, more frequent and active participation of directors in examinations under whatever auspices,—these are the things needed.

1 Report of the Commissioner of Banking for the State of Michigan, 1907, p. xviii.