Limitations as to Loans Since most of the banks in the United States are small, the loans to any one customer are likely to involve excessive concen tration of risk. This danger is increased by the fact that a con trolling interest in the bank may be and often is owned by one person, firm, or corporation engaged in other business. The limi tation on national banks in this respect is that the loans to any one person shall not exceed ro per cent of the bank's capital and surplus and 3o per cent of its capital, but "the discount of bills of exchange in good faith against actually existing values and the discount of commercial or business paper actually owned by the person negotiating the same" is not considered as money bor rowed. Most states have some limitations, modeled upon the National Bank Law, on loans to any one person, the variations ranging from io to 3o per cent of capital, or of capital and surplus, or of capital and surplus and undivided profits. Prac tically all states make the same exceptions with respect to dis counted paper as do national banks and many of the states make additional exceptions, particularly as to loans on real estate, bills of lading and warehouse receipts, collateral securities, and loans approved by special vote of the directors. Loans to directors and officers are likely to be excessive and on slight security, and while the National Bank Law makes no provision against such loans, many states require that they either must be approved by an appreciable majority of the board of directors, or must not exceed certain specified maximum amounts, or must be specially secured.
In almost all of the states, loans may be made on real estate security, but up to 1913 national banks were prohibited from making such loans and some restrictions are still made by some states as to population of city, amount of loan, margin of value of security, character of lien, and the kind of bank empowered to lend on real estate security. This kind of loan is non-liquid and dangerous for a commercial bank, but the power to loan in this way has been very useful to state banks. Because of their greater freedom in extending loans, the state banks have been able to adapt themselves to local conditions more than have national banks.
Requirements as to Reserves, Branches, and Supervision Regulations as to minimum reserves against deposits were, even in those states where such reserves are now required, very tardily made, Connecticut leading the way in 1872. The require ment is not yet regarded as important in many states where regulation is directed chiefly to matters affecting directly the safety of the individual bank. Recently most of the states have made some regulations as to reserves, differing among themselves as to amount, form, and enforcement of the requirement. Some states require the same amount of reserve for all classes of de posits, others require different amounts against the different classes; and still others require reserves only against demand deposits. In some states the reserve must be held in cash or bank
balances, in others it may consist in whole or in part of securities. In nearly every state bank laws allow the redeposit of reserves only in banks inside the state, although in some states the law designates certain cities outside the state, such as New York, Chicago, etc., where reserves may be redeposited.
Branch banking has not developed greatly in any of the states. State banks, like national banks, are decentralized and locally owned. Certain states forbid the opening of branches; others do not provide for them; others definitely permit them. If they are permitted, additional capital for each branch and special author ization by the banking department are usually required. In some states, a bank, denied branches, may own stocks in other banks or trust companies. Until forbidden in 1908, New York trust companies operated state banks, trust companies, and national banks in this manner. Another method is the ownership by a person, a group of persons, or a holding company, of a controlling interest in several banks or trust companies. This is called "chain banking," and is devised often by promoters to finance their undertakings. This has been limited in some states by limitations of loans on stocks of "moneyed corporations" to to per cent of the capital of the corporations whose stock is thus offered as collateral.
Supervision over state banks by special bank commissions arose after 1887. Before that time the banks in certain states made annual reports to some state official. Practically every state now requires reports, and many require yearly several reports of various kinds. The reports are made at the call of the bank supervisor, and are usually timed to agree with the calls of the Comptroller of the Currency. Regular bank examinations started in the New England states, and most states now provide for one or more regular examinations each year as well as special examinations of particular banks. The cost is usually assessed in whole or part on the examined bank. The states also tend to require regular bank examinations by the bank directors. The states put the execution of their banking law into the hands of a superintendent, or commissioner, of banks, whose powers and duties vary widely. Harmony of supervision and uniformity of law are being achieved through the National Association of the Supervisors of Banks. In general, the officials pass upon applica tions for charters, handle insolvent banks and violations of law, appoint receivers or liquidate failed banks, conduct examinations, call for and publish report, etc. The powers of the supervisors have grown gradually in number and extent.