We shall indicate briefly the nature of some of the different kinds of banking institutions.
4. Banks of bank of discount is one which is engaged in lending operations, in addition to accepting deposits. Banks of discount are of two kinds : commercial banks and financial banks, accord ing to the kind of loans they make. In general, it may be said that commercial loans are based on com mercial transactions already in process or completed, such as the purchase and sale of goods. A whole saler sells a bill of goods but will not receive pay ment before ninety days. In the meantime, he finances his business thru a ninety-day loan at the bank. The loan has back of it an actual sale of goods and is to be paid out of the proceeds of the sale. Loans like this, which as a rule do not run over six months, are in the field of commercial banking. Most of the deposits in a commercial bank are payable on demand.
Financial loans are made for investment and de velopment purposes. A manufacturer builds a new plant, borrows part of the funds and wants five years in which to make payment. Loans like this, based on transactions not yet begun and made for promoting new enterprises, are in the field of financial banking. The bank gets its funds for this sort of loan from capital subscriptions, from its own surplus earnings and from deposits left with it for a long time. Obviously, a deposit that is liable to withdrawal at any minute cannot safely be loaned to a railroad for twenty years.
Many institutions do both a commercial and a fi nancial banking business, but a conservative house al ways limits the financial business according to the amount of its permanent funds.
5. Trust early trust companies in the United States and Canada were organized to execute private and corporate trusts and to act in certain fiduciary capacities. In some cases, they also carried on a surety and an insurance business. Nearly all modern trust companies have dropped the insurance business and, in Canada and some of the states, they have branched out into the field of com mercial and financial banking. One of the most im portant functions of the modern trust company is that of acting as trustee under corporate mortgages. It holds mortgages in trust for bondholders, registers bonds, collects the interest, pays the bonds at ma turity and protects the bondholders in case of default.
The early trust companies kept most of their ready cash on deposit with banks. Then they began to put out call loans in the market, to make regular com mercial loans and, finally, to bid for demand de posits. This reaching over into the field of commer cial banking has not always been happy.
There is real danger in the temptation to mix com mercial with financial banking business. The assets of trust companies, especially in Canada, are based largely on real estate and other non-liquid securities. Millions of deposits are accepted with the understand ing that they will be returned upon demand. To loan these deposits on real estate is to invite disaster both for the bank And its depositors.
The trust company has many advantages over the ordinary type of bank because of its comparative free dom from legal restraint and, if it is wisely managed, there is no reason why it should not be safe as well as profitable.
6. Savings savings bank is a banking in stitution, organized for the purpose of gathering to gether the small savings of the community in which it is located and investing them in such interest-bearing obligations as are prescribed by law. The interest so earned is divided among the depositors, after paying expenses, providing for amortization of premiums on bonds and reserving reasonable amounts for the accu mulation of a surplus. In New York State, the sav ings banks have no capital, the depositors being the owners of all the assets of the association. In some states, they are organized with capital stock and run for profit.
7. Savings and loan kinds of savings and loan associations are defined in the New York State banking law as follows: The term, savings and loan association, means .any cor poration formed for the purpose of encouraging industry, frugality, home building, the saving of money by its mem hers, the accumulation of savings, the lending of such ac cumulations to its members, and the repayment to each mem ber of his savings when they have accumulatcd to a certain sum, or at any time when he shall desire the same, or the asso ciation shall desire to repay the same.