CHAPTER XII
BANK SHARES
There is not space in this chapter to deal exhaustively with the risks of shareholders, but it may be mentioned that, with the exception of the old chartered banks, the members or partners of every joint-stock bank in the United Kingdom were, prior to 1858, liable jointly and severally for the debts of the company. This Act, Statute 1858, c. 91, was not, however, compulsory; and although no bank of unlimited liability has since been formed, it was not until the passing in 1879, after the failure of the City of Glasgow Bank, of the Act 42 & 43 Victoria, c. 76, that all the unlimited banks eventually limited the liabilities of their members. Naturally, a person of considerable wealth would hesitate to risk his fortune by buying shares in an unlimited bank which perhaps returned him only 5 per cent. on his purchase-money; but this objection is not now applicable, though it must not be forgotten that the shareholder is liable for a certain known sum, part of which may be callable and the remainder reserved liability, or all of which may be reserved liability and callable only in the event of the company being wound up. Where notes are issued the members may also be liable for the circulation.
Now that the liability on bank shares is a certain sum that cannot be exceeded the investor is inclined to regard them favourably; and though a rich man, who can afford to take a certain amount of risk, may decide to hold a few bank shares among his other securities on account of their higher yield, this liability, be the risk of a bank coming to grief never so small, makes them a most undesirable investment for those persons the interest upon whose capital is just sufficient to supply their wants. Bank shares, in short, are rich men’s shares; but this fact was brought home to the public so forcibly during the Australian banking crisis of 1893 that it seems unnecessary to dwell upon a point which must be apparent to everybody. Besides, we all know that a man of small means cannot afford to incur a liability on bank shares any more than he can sign an accommodation bill, and it would be as foolish of him to accept the one responsibility as the other. Nor is he the class of shareholder to whom the depositor can look with confidence.
While allowing that the great majority of our banks are prudently managed, it must be granted that banking history is a remarkably stormy one, though it is equally true that the surface of the waters has been but little ruffled during recent years; still, the Baring crisis of 1890 is not yet ancient history; and seeing that the banks are intimately connected with the Stock Exchange, the bill-brokers and the commercial community, a person who predicts that a British bank will never again be in difficulties must be blessed by the Almighty with a most sanguine temperament, for such a prediction is altogether opposed to the weight of evidence adduced by the past, and though its fulfilment is eminently desirable, so peaceful a solution of the banking question seems highly improbable.
In Chapter II, on the choice of a banker, an attempt was made to show why a customer should select a strong institution whose working resources are plentiful, and whose reserve of liquid assets is large enough to enable it to meet a drain of deposits during a run or a panic. The shareholder who guarantees the customers of a bank against loss to a limited extent will naturally take care that he is a partner in a company which maintains an adequate reserve of cash and securities as an insurance fund against those accidents which are quite beyond the control of the most able board of directors. A shareholder, say, holds twenty-five shares in a bank. These shares are for £80 each, and the amount paid up upon each is £20. He, then, receives a dividend upon £500, and incurs a liability of £1,500. But he bought these £20 paid shares at such a price that they only yield him 4½ per cent., and he certainly cannot afford to run any great risk for such a return; so he therefore, before purchasing, took care that the bank held a large accumulation of cash and gilt-edged securities as a reserve fund against those banking risks for which he pledged £1,500 of his fortune. Every prudent man should take the same precaution.
The following illustrations, which are taken from the balance-sheets of two English joint-stock companies that need not be named, will clearly demonstrate that there are banks—and banks.
An English Provincial Bank.
Liabilities to the public upon current, deposit and other accounts are given in the balance-sheet as £4,200,000. The bank’s liquid assets are thus described:—
| Ratio per cent. of liquid assets to public liabilities of £4,200,000. | ||||
|---|---|---|---|---|
| £ | £ | |||
| Cash in hand, at call and at | ||||
| short notice | 582,750 | 13·8 | ||
| Consols and other securities | 172,170 | 4·1 | ||
| £754,920 | £17·9 | |||