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B H 502 0^3



GIFT
NOV 10 1928



BRANCH BANKING WITH SPECIAL REFERENCE
TO CALIFORNIA CONDITIONS



V OFTHB

JNIVERSlTYj



HOWARD H./^RESTON

College of Business Administration
University of Washington



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Reprinted from
The Journal of Political Economy, Vol. XXX, No. 4, August i 9 aa



BRANCH BANKING WITH SPECIAL REFERENCE TO
CALIFORNIA CONDITIONS



(f

The question of branch banking is becoming of increasing

practical importance in the United States. At the 192 1 meeting
of the American Bankers' Association the question was the sub-
ject of debate and resolution. A bill has been before Congress
to permit national banks located in states, the laws of which
authorize branch banks, to establish branches in the city where
the head office is located. An amendment of this character has
been supported by the National Bank Division of the American
Bankers' Association, the Comptroller of the Currency, and the
Federal Reserve Board, ^j

^California is developing a system of branch banks more
rapidly and extensively than any other state. In April, 1922,
Messrs. A. C. Miller and J. R. Mitchell, of the Federal Reserve
Board, visited the state to investigate California conditions in
order to assist in formulating the Board 's policy in regard to state
bank members of the Federal Res erve System. A Los Angeles
national bank is making an interesting test of the national law,
which has always been held to prohibit branch banking, by
establishing branches in the home city. These developments cen-
ter attention upon the California situation.

The purpose of this paper is not primarily to set forth the
writer's views upon branch banking but to present the facts
concerning the situation at the present time. California con-
ditions are especially examined because of their significance and
because of the writer 's special opportunity f or studying the situ-
ation in the state. Branch banking has been tried but a com-
paratively short time in California so that tentative conclusions
only can be drawn from the experience of her banks.

Experience with branch banking. — While branch banking is
little practiced in our American states it is characteristic of
banking systems in practically all other commercial nations.

494



696609



BRANCH BANKING IN CALIFORNIA 495

Commercial banking in Canada is carried on by seventeen
chartered banks consisting of 4,851 branches (as reported in
February, 1922). Of these branches 154 are located outside of
the Dominion and the remainder are domestic offices. There is
no central bank in Canada, nor any institution similar to our
own Federal Reserve banks. European systems can best be
characterized as made up of a few large banks with branches
headed up by a quasi-public central bank. The English system
is typical of this class. On December 31, 1920, there were in
England twenty joint-stock banks and five private banks. The
joint-stock banks had 7,257 branches. The Bank of England has
only eleven branches in England and none in foreign countries. 1
HEarly banking in America also furnished many examples of
r branch systems. The First Bank of the United States had eight
branches and the Second Bank of the United States had twenty-
five branches. The state banks of Indiana, Ohio, and Iowa were
typical branch systems. The Free Banking System of New
York was the chief model for the national system. Control of
note issue was accomplished in the Free Banking System by
allowing each bank to obtain a separate charter and protect its
note -issue by the deposit of bonds. Following this model the
national law, therefore, provided for unit banks and bond-secured
currency. The Federal Reserve Act provided for foreign
branches of national banks, under certain limitations, but made
no reference to domestic branches. Federal Reserve banks
were given authority to establish branches, and twenty-three
branches have been established by the twelve reserve banks.
The experience with these branches has been entirely satis-
factory.

Branches of national banks. — The national banking law makes
no provision for branches of the banks created thereunder, but
there is nothing in the language of the statute which expressly
prohibits national banks from establishing branches. Section
5134 of the Revised Statutes requires the organization certificate
to specify among other things: "The place where its operations
of discount and deposit are carried on, designating the state,

1 As reported in the banking number of the London Economist, May 21, 1921.



49° HOWARD H. PRESTON

territory, or district, and the particular county, or city, town, or
village."

It is further provided (Sec. 5190) that "The usual business
of each national banking association shall be transacted at an
office or banking house located in the place specified in its
organization certificate."

The national banking law gives the Comptroller ample power
of control and regulation over the general business of the banks.
The fact that he is not given any specific power to regulate the
establishment and conduct of branches seems clearly to indicate
it was not the intention of Congress to authorize the establish-
ment of branches. This view is further supported by the fact
that the law has specifically permitted state banks, when con-
verted, to retain their branches (Sec. 5155). The attitude of
Congress is further shown by the act of May 12, 1892, providing
that any national bank in Chicago, under specific authorization,
could conduct a banking office on the exposition grounds. A
similar act was passed for St. Louis at the time of the Louisiana
Purchase Exposition. The law must ultimately be interpreted
by the courts rather than by subsequent acts of Congress, but
these sections and amendments indicate rather clearly the atti-
tude of the law-makers.

The construction of the law by the Comptroller has been uni-
formly that a national bank must transact its usual business in
one office. In 191 1 the Lowry National Bank of Atlanta, Geor-
gia, requested permission to establish a branch office in the city.
An opinion was asked of the Attorney- General by the Treasury
Department. J. A. Fowler, assistant to the Attorney- General,
wrote the opinion which was approved by Attorney- General
George W. Wickersham, denying the right of a national bank to
establish a branch for the purpose of carrying on a general bank-
ing business. 1 No case appears to have been brought in the
courts testing the right of a national bank to establish branches.
In his opinion Mr. Fowler cited the case of the Oakland County
Bank, which was established by a special act of the legislature
of Michigan and later opened a branch in Detroit. There was

1 Opinions of the Attorneys General, XXIX, 81.



BRANCH BANKING IN CALIFORNIA 497

no specific prohibition against branches but its action was held
to be illegal by the courts. 1 On the other hand the courts have
clearly recognized the distinction between a mere agency for
the transaction of a particular business, such as the purchase of
bills of exchange, and a branch bank for carrying on a general
banking business. The power to establish agencies has been
sustained by the courts. 2

The Solicitor of the Treasury has also held that a national
bank may not establish a branch or agency for the purpose of
receiving deposits and cashing checks. 3

The fact that the law as interpreted has stood in the way of
the direct establishment of branches by the national banks
has not prevented them from acquiring chains of branch banks
indirectly. Three principal methods have been used to bring
this about: First, national banks formerly state banks, when
converted, have continued to operate branches; second, state
banks having branches have been consolidated with national
banks; third, an affiliated state bank or trust company is organ-
ized and owned by the same stockholders for the purpose of
establishing branches.

In his 192 1 report the Comptroller lists (p. 107) twelve
national banks which fall in the first group — those which had
branches when converted from state banks. With one excep-
tion these banks all have their branches located within the same
city as the parent bank. The exception is the Bank of California,
National Association, of San Francisco. This bank has branches
at Portland, Seattle, and Tacoma. It is an old institution and in
the gold days maintained branches at Virginia City and New York
in order to deal in bullion. It subsequently closed these branches
and found other means of handling this part of its business. In
1005 the Bank of California, then a state bank, consolidated with
the London and San Francisco Bank, an English institution with
head office in London and branches in San Francisco, Portland,
Seattle, and Tacoma. In February, 19 10, the Bank of California

1 People v. Oakland County Bank, I Douglass 282, 288.
a Bank of Augusta v. Earle, 13 Pet. 519.
3 Pratt's Digest, edition 1920, p. 100.



49 8 HOWARD H. PRESTON

became a national association, bringing with it into the system
the three northern branches. This bank has specialized in hand-
ling grain exports to European countries and finds these branches
essential in handling the accounts of large exporting firms which
have their offices in these four exporting cities.

Only five national banks are operating branches as a result
of consolidation with state banks. 1 Three of these are large
New York banks and these three together with three other New
York City banks, converted from state banks, operate an aggre-
gate of forty branches. The existence of those branches is
largely responsible for the popular but erroneous idea that
national banks have a right to establish branches under certain
limitatons. It does make it possible for a national bank to
operate branches but it does not enable a national bank to estab-
lish any additional branches.

No data are available as to the number of national banks
indirectly operating branches through affiliated state banks or
trust companies. Such cases have not been uncommon in states
which accord to state banks the privilege of establishing branches.
In California there are several examples of national and state
banks under joint ownership where the state institution operates
a chain of branches. For instance, the First National Bank of
Berkeley controlled a chain of branches in the city through the
Berkeley Bank of Savings and Trust Company. The First
National Bank of Los Angeles and the Los Angeles Trust and
Savings Bank are under one ownership and this institution has
been one of the most active in the recent extension of branch
banking in California.

In these three ways, therefore, national banks have succeeded
in getting around the law which has stood in the way of their
establishing branches. Although no figures are available there
are probably more branches operated through affiliated state
institutions than by either of the other two methods. Where a
national bank has succeeded to the business of a state bank with
branches, or consolidated with a state bank, the possibility of

1 Under authority of the consolidation act of November 7, 1018. See Report
of the Comptroller of the Currency, 192 1, pp. 108-9.



BRANCH BANKING IN CALIFORNIA 499

further extending its branch system is at an end. Moreover, it
may prove very expensive to acquire a state bank for this pur-
pose.

Believing that the national law may fairly be construed to
allow a bank to establish branches in its home city, W. A.
Bonynge, president of the Commercial National Bank of Los
Angeles, has set up several agencies, or branches, in Los Angeles.
This action followed a conference which Mr. Bonynge and his
attorney held with Comptroller D. R. Crissinger at Washington.
The Commercial National Bank now has in operation three
of the branches, the establishment of which has been formally
approved by the comptroller. Instead of branches these will
be known as agencies. But the name means little, for it is the
purpose of the officers of the bank to receive deposits, pay
checks, and carry on such other banking functions as they deem
expedient at these agencies. If the establishment of branches
should be held to be illegal the obvious remedy is to convert into a
state bank. This the bank's president states he will do rather
than give up the right to operate branches. The test of the
national law upon this point is attended, therefore, with compara-
tively little risk to the Los Angeles bank. But the possible conse-
quences of the action are quite far-reaching. If it is lawful for a
California national bank to establish branches, it is equally so for
national banks jn other states, even where state banks are not
accorded that privilege. State banks will then feel that they
are subjected to unfair competition. Conditions will be just
the reverse of those now existing in California and other states
where state banks are free to establish branches and national
banks are not accorded a like privilege.

The obvious solution appears to be to amend and clarify the
national law in the interest of justice and uniformity. National
banks located in states which allow state banks to establish
branches should be granted the same right. At the last annual
meeting of the American Bankers' Association (held at Los
Angeles, October, 192 1) the National Bank Division adopted a
resolution requesting Congress "to so amend the National Bank
Act as to permit national banks to maintain and operate branches



500 HOWARD H. PRESTON

within the corporate limits of the cities in which the head offices
of such national banks are located, to be confined, however, to
states in which state chartered institutions are authorized to
have branches." 1

The writer sees no valid reason why this request of the
national bankers should not be granted. In fact it appears that
Congress should go farther and allow them the same privileges as
are accorded to state banks in the various states. It will be
necessary, if California national banks are to be placed on a
footing of equality with state banks, to allow national banks to
establish branches anywhere within the state.

If this is not done the national system seems bound to suffer
a relative decline. The superintendent of banks in California
reported that during the fiscal year ended June 30, 1921, nine
national banks joined the state system and six state banks con-
verted into national banks. The net gain to the state system in
aggregate assets was $55,51 i,ooo. 2 This tendency has been
continuing since that time. 3

National banks do not appear to have converted into state
banks for the purpose of establishing branches of their own but
have come into the state system principally as branches of state
banks. For instance, when the Mercantile Trust Company of
San Francisco recently acquired the First National Bank of
Berkeley, it withdrew from the national system an institution
which on September 6, 1921, reported over $6,000,000 of total
resources. 4 Seven national banks are included in the group to
be merged with the Los Angeles Trust and Savings Bank. 5
These larger state banks are members of the Federal Reserve
System. In this way they get practically all the advantages of
national organization. Approximately fifty state banks in Cali-
fornia are members of the Federal Reserve System. 6 Twenty-

1 Journal of the American Bankers' Association, November, 192 1, p. 405.

2 Report of the Superintendent of Banks, 1921, pp. 24, 25.

3 Coast Banker, April, 1922, p. 388.

* Report of the Comptroller of the Currency, 1921, p. 483.

s Bulletin of the California Bankers' Association, May, 1922, p. 159.

6 Coast Banker, March, 1922, p. 290.



BRANCH BANKING IN CALIFORNIA



50I



five of these with total resources of $720,544,000 on December
31, 192 1, were operating branches. These twenty-five banks
represented 46 per cent of the resources of the state system.

Branches of state banks. — Continuous data concerning the laws
of the states generally in regard to branch banking are not avail-
able. In 19 10 Professor George E. Barnett, investigating for
the National Monetary Commission, reported that the laws of
nine states permitted branches of state banks, eight states spe-
cifically prohibited branches, and in the remainder the law was
silent. In the majority of states where there was no specific
provision for branches they were held to be unlawful. 1

The Federal Reserve Bank of San Francisco has just com-
pleted a digest of the laws of the several states relative to branch
banking. Data were obtained directly from the other Federal
Reserve'banks concerning the laws of the states in their district.
Through the courtesy of the officers of the Federal Reserve
Bank of San Francisco this digest was available to the writer
and a summary of it is presented herewith:

SUMMARY OF THE LAWS OF THE SEVERAL STATES
RELATIVE TO BRANCH BANKING



Permitted


Prohibited


No Specific Provision


Arizona


Alabama


*Arkansas


California


Colorado


District of Columbia


Delaware


Connecticut


Florida


Georgia


Idaho


Illinois


Louisiana


Indiana


Iowa


Maine


Missouri


Kansas


Massachusetts


New Hampshire


fKentucky


Mississippi


New Jersey


*Maryland


New York


New Mexico


*Michigan


North Carolina


North Dakota


Minnesota


Ohio


Oregon


Montana


^Pennsylvania


South Dakota


Nebraska


Rhode Island


Texas


Nevada


South Carolina


Utah^


Oklahoma


Tennessee


Washington


Vermont


Virginia


Wisconsin


West Virginia


Wyoming







* Branch banking is practiced.

t Power denied by the courts but there is one bank having branches.

X Only by special act of the legislature.

1 State Banks and Trust Companies since the Passage of the National Bank- Act.
Publications of the National Monetary Commission. Senate Document No. 659,
61st Congress, Second Session.



502 HOWARD H. PRESTON

Classification of states according to whether or not branch
banking is permitted is difficult. Exceptions are numerous and
the lack of specific provisions in the law places some states in an
uncertain position. It will be noted that the laws of sixteen
states now prohibit branch banks, seventeen states permit them,
and in fifteen states and the District of Columbia there is no
specific provision in the law. Of the fifteen states in the laws of
which there is no specific reference to branches, four practice
branch banking to some extent and the other eleven do not
now allow branches of state banks. This increases the total
number of states in which branch banking is not tolerated to
twenty-seven, and of those in which it is apparently allowed in
some form to twenty-one. The laws of some states, for example,
New York, Massachusetts, and Ohio, permit branches only in
the same city. Branches are now permitted in New York only
in cities of 50,000 or more.

In some states where branches are now prohibited, banks
are still operating branches established prior to the passage of
the present law. Professor R. B. Westerfield shows that state
banks in at least twenty-three states were operating branches in
1920. 1 Alabama, New Jersey, Washington, Wisconsin and Indi-
ana, are states having branch banks, according to his compila-
tion, the laws of which now prohibit the establishment of new
branches. These states cut off the right of banks to establish
branches in the years 1911, 1915, 1919, 1919, and 1921, respec-
tively. A comparison of the 1922 figures with those of Professor
Barnett for 19 10 shows a gain in the number of states in which
branch banking is being practiced.

Banks have sometimes been brought under single control
even in states where branches are not permitted. A national
bank is prohibited from owning the stock of another bank and
the laws of a majority of the states also prohibit state banks from
owning the stock of other banks. But it is almost impossible
to prevent the ownership of several banks by the same person
or group of persons or a holding company formed for this purpose.

1 Banking Principles and Practice, II, 298.



BRANCH BANKING IN CALIFORNIA 503

In this way "chains" of banks have been maintained in spite of
prohibitory laws.

Branches of state banks in California. — The Bank Act of Cali-
fornia provides that branch offices may be established with the
written approval of the superintendent of banks. He is directed
to give such approval only when "he has ascertained to his satis-
faction that the public convenience and advantage will be pro-
moted by the opening of such branch office." 1

When the branch office is to be opened in the city where the
principal office of the bank is maintained the bank must have
$25,000 capital for each branch in excess of the minimum require-
ment for a state bank in that city. For each branch, other than
a trust company, outside of the principal place of business the
capital must be at least equal to the amount required for an
independent bank at the place where each branch is established.
In other words, a San Francisco bankwhich wishes to establish a
branch in Berkeley must have a minimum capital of $300,000
plus $100,000 for the Berkeley branch, this being the amount
required for separate institutions in these cities.

The law further limits the extension of business upon a given
capital by fixing a minimum percentage of capital and surplus
to deposit liabilities, graduated according to- the volume of
deposits. In commercial banks the proportion ranges from 10
per cent of deposits up to and including $2,000,000, to 5 per cent
of deposits in excess of $5,000,000. In savings banks the propor-
tions are graduated down from 10 per cent on deposits of $1,000,-
000 or less to 1 per cent on deposits in excess of $25,000,000.*
Since a branch system is treated as a unit this principle of
graduation enables a bank having fifty branches to carry on a
given volume of business with less capital and surplus than if
the system consisted of fifty unit banks.

As a matter of fact there does not appear to be any tendency
for the banks to utilize this possibility. An examination of the
statements of the larger banks shows that they have capital

1 Bank Act of California, Section 9.
* Ibid., Section 19.



504 HOWARD H. PRESTON

and surplus far in excess of the minimum requirements. Gener-
ally speaking the capital is increased as the number of branches
increases. It is true, nevertheless, that many mergers result in
a temporary decrease in banking capital, since stockholders of
the bank to be absorbed are paid in cash or by stock in the larger
bank, which stock the directors have obtained for this purpose
by purchase in the market. The combined capital is thus
reduced by the amount of the capital of the bank absorbed.
This has been done in more than one of the recent consolidations.
Another method, used by at least one of the Los Angeles banks,
is to exchange unissued stock in the main bank for the stock of
the bank to be absorbed. Authorized stock is held in the treas-
ury which may be used for this purpose.

At the present time (May, 1922) there are seventy-nine state
banks in California operating 254 branch offices. Of these
branches 151 are in cities other than those in which the banking
corporations maintain their principal place of business. The
remaining 103 branches are in the same city as the head office of
the bank.

The general policy of the superintendents has been to sanction
the establishment of branches in outside cities only through the
acquisition of existing institutions. In the case of branches or
agencies in the same city very little restriction has been imposed
upon the action of the banks. The purpose of the policy of
limiting the extension of banking offices in country towns is to
protect the banks and public against the evils of excessive
competition. Exception has been made when local conditions
seemed to warrant the establishment of another bank.

Metropolitan branch banking. — In discussing branch banking
in California different types of development must be recognized.
Distinction must be made between what might be called metro-
politan branch banking and state-wide or district branch bank-
ing.

In the larger cities of the state, chiefly San Francisco and
Los Angeles, there has been quite a marked development of what
can best be described as metropolitan branch banking. This
type of branch system is found in several other cities of the



BRANCH BANKING IN CALIFORNIA



505



United States so that California 's experience in this respect is not


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Online LibraryHoward Hall PrestonBranch banking, with special reference to California conditions → online text (page 1 of 3)