There are marked differences also in the matter of paying in the required capital. In some cases the paying in of the capital subscribed is left to the directors to handle, in others specified sums or proportions up to the total authorized capital must be paid in before the banks can begin business. The provisions of the national banking law on this subject have been freely copied in a good many states.

Somewhat the same thing must be said concerning the surplus. A large number of states require the definite setting aside of a part of the annual net earnings for the creation of a surplus fund. Twenty per cent of the capital seems to be the favorite minimum requirement. Prohibitions against the impairment of capital and against the payment of dividends except out of net earnings are also common.

There seems to be a uniform objection in all the states to anything like thoroughgoing branch-banking. Branches are expressly forbidden in some states while in the states where branches are permitted their establishment is subject to narrow restriction. In most cases the establishment of a branch requires the consent of the banking authorities, while there is also a pretty uniform requirement that each branch have its own capital.

Diversity in state regulation

Capital

Paying in capital

Surplus

Objections to branch banking

While in most states the extension of credit in the form of notes would be legal for the state banking institutions, as already indicated the imposition of a 10% tax by the federal government removes note issue from the field of possibility for them. The credit of state banks is thus in practice made available only in deposit form.

In this field the restrictions on the state banks are much less drastic than are those imposed on national banks. Real estate, for example, has always been pretty generally accepted as security for advances by the state banks, although limitations of one kind or another are usually imposed. These limitations have had to do with the location of the real estate, with the character of the lien given as security for the loan, and with the proportion of the selling value that could be extended as a loan. In general the determination of what is satisfactory security for advances of credit is left to the discretion of the bankers themselves.

Reserve prescriptions, however, are common. Here, too, as might be expected, the prescriptions vary. Differences arise as to the amount of the reserves required, as to the form of the reserves, and also in the methods provided for enforcing reserve requirements. A distinction is commonly made between demand and time deposits, smaller reserves being required for the time deposits. The range of percentages is from 4% to 15% for time deposits and from 10% to 25% for demand deposits. In some cases reserve requirements vary with the population of the localities where the banks are established. The required reserves need in most cases to be only partly cash on hand, sums deposited with bankers up to specified proportions of the required reserves being pretty generally regarded as equivalent to cash on hand. In some cases a proportion of the reserves may be held in the form of securities. Nowhere in the states is there any recognition of the desirability of mobilization of reserves; indeed there are numerous examples of insistence upon a contrary system of isolated and independent units.

No note issue

Deposit expansion

Reserve prescriptions

Amount

Composition

In the enforcement of reserve requirements general dependence is placed on the prohibition against new loans and discounts when the reserves drop below the established level. There is also a common provision that in case of failure to restore reserves after due notice by the responsible supervising authorities, proceedings for the appointment of a receiver may be instituted. Or, in lieu of such a provision, the supervising authorities may themselves be authorized to step in and liquidate the bank's affairs.

From the viewpoint of state legislation more importance seems to have been attached to ultimate security than to the immediate liquidity of state bank assets. The restrictions based on the idea of safeguarding security are much more important and numerous than those aiming to insure liquidity. The amount loaned to any person, firm, etc., is usually limited to a percentage of capital and surplus, although in this connection bills of exchange drawn against actually existing values and paper actually owned by the borrower are not included as a part of the loan. Loans on bills of lading and on warehouse receipts are also commonly excepted, while in some cases similar exception is made of loans on collateral security, or simply where the directors so vote. There are also not uncommonly provisions against excessive loans to directors or to officers.

Reports by the banks to duly constituted officers are of course generally required, and it is usually within the province of such officials to determine the form of such reports. In some cases the minimum number of the reports per year is specified. In other cases the number as well as the time for making them is left to the discretion of the supervising authorities. Publication in the local press is commonly regarded as an essential element in a system of reports.

Enforcement of requirements

Security rather than liquidity sought

Reports

Examinations by the state banking authorities seem also to be looked upon as a normal element in the governmental supervision of state banks. Most of the states require such examinations. The number of examinations required varies from one to four a year, although in a few cases this matter is left to the supervising authorities themselves. In a good many states special examinations of the affairs of the individual banks by the directors themselves are required. This seems anomalous, but experience has proved that oftentimes the directors have had but a hazy notion of their bank's real condition.