The minimum requirements vary from $5,000 to $100,000. In some states the amount is graded ac cording to the size of the community in which the bank is to be established. This is the principle which was applied in the National Banking Act. It is a crude way of regulating the ratio of capital to the volume of business, but it has the advantage of being simple to administer. Kansas has adopted a more scientific plan. The law limits the total investments of any bank to four times its capital and surplus. As a re sult of this provision, the Kansas banks are accus tomed to carry a large part of their earnings to sur plus, thus adding to the strength of the bank.
While practically all the states now require the subscription of a minimum amount of capital, they do not have adequate laws to enforce the actual pay ing in of the capital or to prevent its retirement after it is paid in. Consequently many depositors have been deceived when reading bank advertising, because in many cases the nominal and not the actual paid up capital is published. There is something to be said in favor of allowing a part of the capital to be paid in instalments after the bank begins business. Not all the capital is needed at first, and the provision makes it easier to establish banks in new communi ties. The trouble lies in the fact that people are often led to believe that the bank is stronger than it is. A general principle may be laid down that no bank should be allowed to impair its capital without good cause.
7. Supervision.—The aim of bank supervision is to make sure that the law is being complied with and to impower some official to act when violations occur. Two means are used in reaching a conclusion as to whether a bank is obeying the law: (1) frequent re ports under oath are required from bank officials; (2) examinations are made from time to time by state officials. Reports and examinations should come at times when the bank is not expecting them, so as to prevent "window dressing." Some state examiners are paid by fees, receiving so much for each bank that is examined. Sometimes the amount of the fee is made to vary with the size of the bank. Usually the expenses are paid by the banks. The fee system of payment is undesirable. It tends to cause the examiner to rush thru his examination so as to get to another bank and earn as much as possible. The same criticism has been made against the National Banking Act. The Comptroller of the Currency said, in his report for 1887: "The present system establishes relations be tween the bank and the examiner which are incon sistent with the duties of that officer, and with what ought to be his attitude toward the bank." The
Federal Reserve Act corrects this evil by placing the examiners on a salary basis. Most states have already adopted the salary system. Banks are as sessed for the expenses just as under the fee system.
A few of the states do not require regular reports; a still greater number do not make any provision for regular examinations. A considerable advance has been made in this respect, however, since 1880. The southern and northwestern states have been most backward. Over half the states give state officials power to apply for a receiver if the bank's condition is unsound. A somewhat smaller number give the officials power to take possession of a bank, pending the appointment of a receiver.
8. Real estate loans.—The permission to make loans on real estate has been one of the most char acteristic distinctions between the powers of state and of national banks. The Federal Reserve Act alters this by permitting national banks to lend on real es tate under certain conditions. The danger of lend ing on real estate is well known. While it may be permitted to a certain extent, the limits should be carefully defined.
Something may be said however, in favor of lend ing on real estate. In the development of every com munity there is a time when the functions of a sav ings bank and of a commercial bank are blended in one institution. In an agricultural community a bank is a place for the deposit of savings. If the proportion of long-time deposits is sufficiently large, there is no reason why a part of the bank's loans should not be based on real estate. The returns are relatively high. As a community grows, two kinds of banks arise which become quite distinct in their nature. The one is a savings or investment bank; the other, a commercial bank. Speaking generally, the distinction becomes more and more clear as the population becomes more dense. Commercial banks in large cities, and even in the most thickly populated states, such as New Jersey, have few time deposits and therefore they should not lend on real estate in any large amounts. This principle is recognized to a limited extent in the provision of the Federal Reserve Act, which prohibits banks in central reserve cities from making real estate loans. In conclusion, it may be said that there is nothing inherently bad in the real estate loan, so long as it is made by the right kind of bank and is not carried to excess.