PROTECTION OF DEPOSITORS Special Protection in the United States For reasons presented in the preceding chapter, the state has not been as solicitous for the protection of depositors as it has for the protection of noteholders. Indeed, much of the protection to noteholders has been given to the direct detriment of the deposi tors. For instance, the segregation of some of the best assets of the bank (government bonds, prime commercial paper, gold, etc.) as specific security for outstanding bank notes, weakens the security for the deposits; giving noteholders a first and paramount lien on the assets of a failed bank has the same effect.
In countries other than the United States and the Nether lands, the protection provided for depositors by law has been only such as is provided for creditors of the bank in general—that is, such protection as comes by limitations on the loans and invest ments and business activities of the bank, by periodic examina tions and careful supervision of the banks by a state or federal banking department, by prohibition of interlocking directorates, and so forth. As the volume of deposit business in the Nether lands is small, absolutely and relatively to the note issues, the United States may be said to stand alone among the deposit banking countries in its efforts to give special protection to de positors.
Provision for Protection Two methods of protection are provided in the United States. Both the federal and state laws require minimum percentage re serves to be held against deposits. Since the state and national banks are competitors, the state reserve requirements do not exceed, and are usually equal to or less than, the federal require ments, but the plans are similar. The minimum percentage re serve requirements under the National Bank Act and under the Federal Reserve Act, with amendments, along with the good and bad features of the system, are treated in Volume II, Chapters XXI and =II.
Another method is in use in the states of Oklahoma, Kansas, Nebraska, Texas, Mississippi, South Dakota, and Washington, where provision is made for the compulsory or voluntary insur ance, or "guaranty," of deposits.
Methods of Guaranteeing Deposits In periods of depression and panic in the Middle West, high losses by bank depositors have occasioned legislative movements for their protection. Out of the panic of 1907 arose various plans
for the guaranty of deposits, and in 1908 Oklahoma enacted a compulsory system of mutual guaranty, which was followed by guaranty legislation in the Dakotas, Nebraska, Kansas, Texas, Mississippi, and Washington. The plans so far tried are four in number: 1. Voluntary state-supervised associations of banks which collectively guarantee the deposits of the members and pay the depositors of a failed member out of a fund sub scribed to by the members in proportion to their aver age guaranteed deposits.
2. State-wide compulsory systems requiring all state banks to pay regular and occasionally extra assessments, determined by the amount of defaulted deposits and proportional to the average guaranteed deposits of the assessed banks.
3. Systems permitting or requiring state banks to form associations without state supervision and mutually guaranteeing their depositors.
4. A system whereby some insurance or casualty company enters into contracts with the several banks to insure the depositors of those banks against loss; the premium paid by such banks to the insuring company varying, of course, with the respective bank according to the factors of risk, such as management, policy, location, financial record, and so forth. For the most part de posits are a bad form of risk, are not actuarially pre dictable, and require too constant supervision by the insuring company. Only two companies are known to the author that handle such insurance at present. This form of guaranty is entirely independent of state action.
Safety Fund Plan The first application of the safety fund plan to protect deposits was in the form of a bank law in New York State in 1829, though the apparent intention of the legislature was to guarantee notes only. After a near failure of the scheme, because of the inade quacy of the fund to protect both notes and deposits, its applica tion to deposits was abandoned in 1837. The heavy bank failures during the depression after the panic of 1893 injected into the more general Populist movement of the mid-west states a demand for the guaranty of deposits. Only the returning prosperity after 1898 stemmed the inauguration of the system in Kansas and Nebraska at that time.