Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

Capital and Surplus Requirements

When the States began to give attention to the regulation of the banking business the question of capital received immediate attention. The national-bank act and the banking laws in New York and the Middle West which had survived from the antebellum period contained provisions concerning the amount and payment of capital. A requirement with regard to capital was recognized as the central point in any system of bank regulation. The capital stock is a buffer interposed between the bank's creditors and losses which the bank may suffer. If there is no capital, losses may fall directly on the creditor, and the larger the capital stock, other things being equal, the less the likelihood of loss to the depositor.

The States and Territories may be divided roughly into two groups according to the amount of the smallest permissible capital for state banks:

1. In the Eastern States and the more easterly of the Middle Western States, the banking laws, with one exception, require that banks shall have a capital of at least $25,000.

2. In the other sections of the United States banks in most of the States are incorporated with a capital as small as $10,000, although in a few of these States the smallest permissible capital is $15,000, $20,000, $25,000, and $30,000, and in one, North Carolina, it is $5,000.

The amount of capital required, except in a few States, is not a uniform amount, but is graded, usually according to the size of the city in which the bank is located. In 29 of the 37 States and Territories which require under a general law a specified amount of capital for the incorporation of state banks the amount of capital is thus graded. The grading of the amount of capital required according to the population of the place in which a bank is located has been chiefly due to the desire to bring about some adjustment between the capital of each bank and the volume of its business. It is assumed that the larger the business of the bank the greater the chance of its suffering large losses and the larger the capital necessary to protect its depositors against loss. It is also assumed that the size of the city in which it is located is a rough index of the volume of business done by a bank. Under many of the state banking laws the grades are very numerous. The minute gradation of the capital requirements found in many of the state banking laws is due to the desire to encourage the formation of banks in the smaller cities and towns, for it is to be noted that in the greater part of the state laws the grades are not numerous for the larger places.

Obviously, if any law requiring a minimum capital for banks is to be effective, it must provide specifically for the payment either of all the capital or of a specified sum; otherwise the directors of the bank may require the payment of only a small part of the capital. The provision in the national-bank act concerning the payment of capital has been the model for similar provisions in the banking laws of a large number of the States. Many of the state banking laws likewise contain the same provision as the national-bank act with reference to surplus.

In several States the laws make no provision with reference to the amount of capital required for a trust company. In Connecticut, Delaware, New Hampshire, and Vermont, trust companies are incorporated only under special acts and the amount of their capital is determined in each particular case by the legislature. In Rhode Island trust companies are incorporated by a board which has power to fix the terms of incorporation, including the amount of capital.

The first general laws for the incorporation of trust companies in the United States required such companies to have a much larger capital than that required for banks, but the later legislation shows a distinct tendency in the direction of lowering the requirements in regard to capital. In nearly all of the States, however, the requirement for trust companies is still substantially different from that for state banks. The smallest permissible capital for a trust company ranges from $5,000 in North Carolina to $1,000,000 in the District of Columbia. The majority of the States, which provide that trust companies must have a specified minimum capital, do not permit the organization of trust companies with a smaller capital than $100,000.

In only one State, Iowa, is the smallest permissible capital less for trust companies than for state banks; in six States it is the same; in all the others it is larger. The accumulation of a surplus is not required in so many States for trust companies as for banks.