The subject of government supervision was given some consideration in Chapter V, which studied the bank as a type of business organization. It was there noted that banks are subject to practically all the legal restrictions applying to other corporations, and besides must comply with a number of special regulations. These additional limitations are justified by the singular nature of the banking business. Banks in a way are quasi-public enterprises, for through their ability to extend or withhold credit they influence the progress of all other industries. A bank differs from an ordinary business in that it is not a single unit whose success or failure is of little concern to other banks, but, on the contrary, its welfare vitally affects all of them, since each institution is an integral part in the credit structure which to a certain extent becomes impaired by even one failure. For this reason, because of the public nature of their business, bankers themselves have realized the need of government supervision. Government supervision is particularly essential in the United States. In this country, very few banks have been permitted to establish branches, and concentration into a small group of financial institutions has been restrained. Instead, encouragement has been given to the development of small independent banks, and their total number is now over 30,000. Supervision is more readily obtained in a system of a few consolidated institutions than among a mass of many banks operating under varying conditions throughout the country.

Government supervision aims to protect stockholders, noteholders, and depositors of banks by seeing that these institutions observe the principles of solvency and liquidity. In general, the solvency of any busine depends upon the adequacy of resources in meeting liabilities. When the obligations exceed the assets of the corporation, the situation may be met by drawing upon the capital investments, but this impairment brings loss to the stockholders. The maintenance of solvency is thus a problem which confronts every business enterprise. In addition, a bank carries the responsibility of continually retaining its assets in a state of liquidity. At all times it must be able to pay the demand claims of its creditors, whether depositors or noteholders. A bank may be in a solvent condition, but, nevertheless, its assets may not be sufficiently liquid to satisfy the immediate demands of its creditors. If the bank can tide over this temporary embarrassment, its assets may have sufficient permanent value in the end to prevent dissolution. The solvency and liquidity of banks are thus determined by different factors. The former is shown largely by the proportion of the capital investment to general liabilities, while the latter is based upon the ratio of a reserve of liquid assets to demand obligations. In regulating banks the government can develop their solvency by exacting an adequate contribution of capital and surplus, and their liquidity by insisting upon the maintenance of a sufficient reserve. The government also requires that assets in general be satisfactory in character and that loans in particular be sound.

To attain these ends, national and state governments have established administrative bodies and have enacted legislative regulations. The federal regulations are well codified in the National Bank and Federal Reserve acts, but there is little uniformity in the banking legislation of the various states. A striking comparison is found between the banking laws of New York, which contain 280 pages, and the statutes of a state like Arizona, which include but 12 pages. The national and state regulations cover the following subjects: (1) procedure for establishing a new bank, (2) requirements of capital and surplus, (3) restrictions on granting of loans, (4) security for circulating notes (national only), (5) report of financial condition, (6) examination of banks, (7) maintenance of reserves against deposits, (8) liquidation of insolvent banks, (9) procedure in the event of failure to meet the requirements of the law.

The procedure for establishing a new bank and capital requirements have been already discussed in Chapter V, restrictions on loans have been considered in Chapter VIII, and a discussion of others will be deferred until later. Some of the remaining subjects will now be treated in so far as they relate to commercial banks. Government regulation of noncommercial institutions will be considered in Part III.