Neglect of the precaution of spreading advances over different suitable classes of investment has brought many banks to ruin in the past, and under similar conditions would do so in the future. This danger is not now so pressing as in former times. Owing to the present custom of establishing branches, and to amalgamations, the operations of banks are now frequently spread over wide areas, and therefore automatically their advances tend to spread over many more industries and securities than was formerly the case. When banks were more local, their prosperity rose or fell with the industry and conditions of their particular district.
We see then there is danger in locking up too large amounts in advances on any one class of security. But there is an equal danger in advancing too large sums to a few customers. A firm may be of very good standing and report, and keep a first-class and highly remunerative account with its banker. From time to time it has advances from its banker, which he is very glad to make, and which are regularly repaid. But a time may come when an advance may not be repaid when due; instead, a further advance is asked for. This is made without question, and probably further advances, always increasing and never reducing. After a time the banker may become a little fidgety, and cautiously suggest a reduction, but will probably be told that ample funds will come to hand shortly. When this time comes the funds may not have been received, and the customer may insist that he must have further help, or he will not be able to meet his obligations. The banker should require ample cover before advancing further sums; but if he is weak and yields to pressure, matters will go from bad to worse, until the customer may practically rule and command the bank, the two concerns will be involved together, and when the customer “goes” the banker will go too, or at the best suffer a big and weakening loss—not only loss of money, but loss of credit, which will affect him seriously in the future, and may ultimately cause his fall.
This danger is not a hypothetical one. It is unfortunately founded on fact. It was this cause which led to the disastrous and all-reaching failure of the City of Glasgow Bank. When the position of that bank was examined it was found to have lent as much as six million pounds among four customers. Gilbart says: “Almost every bank that has failed can point to some one, two, or three large accounts to which it mainly attributes its failure.”
On looking at the last column of our table we see that all the banks hold assets in excess of liabilities to the public; the excess is in respect of the capital and reserve fund. As an additional security for the depositors, each bank has only a part of its subscribed capital paid up. The remainder, the uncalled capital, constitutes an extra reserve for the benefit of the depositors.
The profits made by joint-stock banks are high, the majority of dividends varying between 10 and 20 per cent.; and notwithstanding such satisfactory dividends, large reserve funds have been accumulated from undivided profits. These reserve funds in some cases equal, and even exceed, the total of the paid-up capital. It may be added that many of the banks are popularly credited with holding other reserves which do not appear in their balance sheets.
CHAPTER X
THE BILL-BROKERS
The business of the bill-broker is one that has grown up during the past century—chiefly during the latter part of it. A bill-broker acts the part of an intermediary between banker and merchant. At first glance the need of such an intermediary is not very apparent, considering the large number of banks now in existence which keenly compete for business. On looking further into the matter, however, the importance and utility of the bill-brokers, both to banker and merchant—that is, to those who wish to buy bills and those who have them to sell—become apparent.
To undertake the business of discounting bills successfully great knowledge and discrimination are necessary; knowledge that can only be obtained by experience, and discrimination by keeping in touch with the changes occurring in the standing and position of the mercantile and financial community. As with the rest of the world, merchants and financiers do not stand still; they progress or they fall back. Many bills which in 1893 would have been treated as first-class paper are now, in 1903, looked at askance; while the acceptances of many firms who were unknown ten years ago are now readily taken. It is the business of the bill-broker to keep himself thoroughly informed of the “standing” and “position” of the mercantile community, so that he can readily discriminate good bills from doubtful ones.