The Financial Position of the Bank (1927)
(Reproduction of Chapter 27 of J P Hilton's book:
Britain's First Municipal Savings Bank)
If there is one thing more than another which ought to characterise any savings Bank, it is absolute security for the depositors. Nothing in the way of profits, or rates of interest on deposits, should be allowed to prejudice the security of the capital, and it is proper here to examine how far the Birmingham Bank may be considered to satisfy this condition.
It is the more necessary to look carefully into the financial aspect of the operations of the Bank, because fears have been expressed lest the rate of interest allowed to depositors, viz., 3-per cent. should be higher than is prudent, and because of the suggestion that the resources of the Bank are not sufficiently liquid.
The balance sheet at the end of March, 1927, discloses that the sum of 7,800,221 3s. 0d. was standing to the credit of 225,760 depositors in the Bank, and that of this sum there was outstanding, in respect of loans for house purchase, 1,567,358 7s. 7d. Cash in hand at Head Office and at the joint stock banks amounted to 736,154 18s. 4d., and the sum of 5,464,754 8s. 6d. was with the Corporation at call. The reserve fund stood at 99,993 0s. 3d.
It will be seen that cash in hand is a little less than three-quarters of a million, whereas house purchase loans are rather more than double this amount and form about one-fifth of the total deposits. Originally, the Bank Committee decided to limit advances for house purchase to one-third of the deposits, but up to the present the amount of the advances outstanding has never exceeded one-fifth of the deposits. It will be conceded that this proportion of funds used for house purchase advances is reasonable, provided that the 5,500,000 placed with the Corporation is available to meet the liabilities of the Bank.
Let us see what happens to the money placed with the Corporation. By arrangement between the Bank and the Finance Committee of the Council, 50 per cent. of the money is invested in trustee securities (including 2,000,000 in war loan), and the remainder is available, at the discretion of the Finance Committee, for general Corporation purposes and as a set-off or reduction of bank overdrafts on other Corporation accounts.
Now let us consider for a moment what is the worst that could befall the Bank. It must be remembered that in the case of a Municipal Bank its resources are founded upon the security of the rates. In a city like Birmingham, with its long history of progress and development, it is almost impossible to conceive of such a loss of Municipal credit as to cause a panic among depositors. Let us assume, however, that owing to some great local disaster - a huge fire, a local general strike or lock-out - there has arisen a rumour which has led to a run upon the Bank. Such a run would be the result of a loss of confidence, but that confidence would be restored as soon as it was clear that all demands would be met. The Corporation would have no difficulty in meeting such demands, and would, naturally, fall back upon their own liquid resources in the first instance. In the very unlikely event of these being exhausted the Corporation could make arrangements with their bankers, with whom they are in a position to deposit large blocks of trustee securities, sufficient to cover an advance which might be necessary.
With regard to the rate of interest paid by the Corporation to the Bank, this is discussed and agreed upon by the two committees concerned from time to time. It is naturally variable and dependent upon circumstances, but has always been below the rate which the City Treasurer is prepared to pay for mortgage money or outside borrowing.
Lastly, as to the rate of interest allowed to depositors. It is not denied that the Bank has, up to the present, been able to pay a rate of 3-per cent and at the same time show a surplus sufficient to provide for the building of new branches, the adaptation and equipment of temporary premises, the writing-off of substantial sums by way of depreciation, and the building-up of the reserve previously mentioned. But it is said that when a general cheapening of money takes place, the present rate will be found to be too high, and then either the Bank will go on paying that rate with disaster to itself, or it will reduce the rate and lose its depositors. The answer to this is short and simple. The rate is not fixed and unchangeable. It was originally settled at a level which gave a somewhat more attractive yield than that offered by the Post Office, and yet a rate which the Bank Committee were of opinion could be maintained for a very long period. If ever the time should come when financial conditions are such as to make the rate of 3-per cent. too high, it would no doubt be lowered, but since any lowering of rates would be general, depositors would not have anything to complain of. Nor will anyone who has had experience of the Bank fear, for one moment, that depositors will go elsewhere, even if the rate of interest is reduced. Convenience, custom, sentiment, all pull in the same direction, and it may be confidently said that nothing foreseeable can now shake the stability of the Bank or the faith of its depositors.