The emphasis in improving rates of return belongs on making the investment in banking pay better by opening up new fields of usefulness and by increasing efficiency. The large mergers in New York City promise to have that effect. Lower costs in New York City The lower profits reported by banks in New York City, due chiefly to competitively low interest rates and generous capital investments, occurred despite the fact that operating costs were lower here than at banks in large cities elsewhere. As table 11 reveals, banks in the central reserve district of New York City had significantly lower expenses per average dollar of assets than other reserve city banks in every year since 1946. To what extent these differences in expenses can be attributed to efficiency, or to economies of size, or to the type of business done by the various banks, cannot be simply inferred from the expense statistics alone. In the context of other findings, however, the Department believes that these figures attest the drive for more efficient operations which lies behind much of the recent merger activity among commercial banks in New York City. TABLE 11.-Operating expense as a ratio of average assets, member banks, 1946-54 Competition from other financial institutions In supplying the deposit, saving, and borrowing needs of the people of the city and the State of New York, commercial banks are in strong competition with other types of financial institutions. Over the last 15 years, these other institutions have been able to attract liquid funds to themselves at a faster rate than have commercial banks. The competitive struggle of commercial banks for their share of the supply of funds is indicated in the chart and in table 12. Fastest of all has been the growth of savings and loan associations and credit unions. The former expanded by 51⁄2 times since 1940 and the latter by times. Savings banks, insurance companies, and licensed lenders have multiplied their assets by about 21⁄2 times. At the bottom of the list were commercial banks, which did not even double their assets during this 15-year period. TABLE 12.-Growth in assets of financial institutions in New York State, 1940-54 Includes State banks, trust companies, industrial banks, and private bankers. 454.5 * Estimated on basis of Sept. 30, 1954 data, the latest available. The estimate was derived by assuming the same proportion of loans to assets on Sept. 30, 1954 as existed Dec. 31, 1953. Loans outstanding as of Sept 30, 1954 are available, while assets are not. 3 the data represent total admitted assets of all life-insurance companies licensed to do business in New York State. 4 Estimated. As of Sept. 30, 1954. Year-end data not yet available. Sources: Commercial banks: Quarterly reports: Federal Reserve Bank of New York. Licensed lenders: Annual reports, 1940 and 1954. Insurance companies: New York State Insurance Department reports. Savings banks: Annual report, 1940, Quarterly Call Report, 1954. Credit unions: Annual report, 1940; U. S. Department of Health, Education, and Welfare. Savings and loan associations: Annual report, 1940, Quarterly Call Report, 1954; Federal Home Loan Bank of New York. Competition for deposits The rivalry for the banking and savings patronage of New Yorkers can be presented from a somewhat different viewpoint, by comparing the number of accounts and the corresponding amount of deposits that were gained by various banking organizations since 1940. Here, also, savings and loan associations were out front, trebling their number of share accounts. Credit unions came next, with twice the number of accounts at the end of 1954 compared with the prewar period. Closely following in third place, however, was the number of demand deposits at commercial banks, which also almost doubled. The lowest rate of expansion in number of accounts was shown by savings banks and by special interest accounts of commercial banks, both revealing relatively little growth. In brief, banks demonstrated no notable tendency during this period to preempt the deposit or savings function to the exclusion of competitors. Increased competition for savings The relationship between banks and their customers is a dual one. As borrowers, people want to obtain the lowest interest rate available. As suppliers of funds and savings, they want the highest rate which a free market will allow. During the postwar period, the Department has taken a series of steps to permit the competition for savings to assert itself more freely. Although this action related primarily to savings banks, the repercussions were soon felt among commercial banks and other institutions accepting liquid savings. RELATIVE GROWTH IN DEPOSITS TABLE 13.-Growth in number of accounts and deposits of financial institutions in New York State, 1940-54 Includes State banks, trust companies, industria] banks, and private bankers. National-bank data on number of accounts and on amount of special interest deposits not available. Accounts of individuals, partnerships, and corporations. Excludes club, commercial, governmental, and interbank time accounts. Excludes school and club accounts. Payroll accounts are included. June 30, 1954, data, latest available. Free shares only. Sept. 30, 1954, data, latest available. Sources: Commercial banks: Quarterly reports. Savings banks: Quarterly report and 1940 annual report. Savings and loan associations: State: 1940 and 1954 annual reports; Federal: Federal Home Loan Bank Credit unions: State: 1940 and 1954 annual reports; Federal: U. S. Department of Health, Education of New York. and Welfare. At the beginning of 1952, the Banking Board raised the dividend ceiling of savings banks from 2 to 22 percent, and 2 years later, in October of 1953, lifted it entirely. The purpose was to remove the shackles on competition that were imposed during the emergency conditions of the thirties when institutions had to bear heavy losses and were collectively unable to maintain dividends at the often excessive rates to which intense competition had driven them. In view of the postwar improvements in the real-estate market and the resulting betterment in earning capacity, the Department wanted to give a spur to savings bank management to participate more fully in mortgage lending and to pass on to their depositors a greater reward for saving. The response in the competition for the savings dollar was immediate, as can be briefly summed up in certain key statistics. In 1951, before the Department had taken any action, savings banks almost without exception paid at a rate of 2 percent. Today, over one-third of all savings banks in New York State pay a dividend rate of 24 percent, including extra dividends in a few cases. Virtually all of the rest pay dividends of 221⁄2 percent. The competitive effect of these higher rates was speedily transmitted to commercial banks handling thrift deposits. In 1951, three-quarters of all Statechartered commercial banks were paying 1 percent or less on special interest accounts and only one-quarter paid as much as 12 percent or even 2 percent. At present, almost two-thirds of State-chartered commercial banks pay their thrift customers 2 percent or more, and less than one-quarter still maintain a rate of 1 percent or less. Significantly, throughout this period the higher rates were adopted most quickly and most widely by institutions in New York City, which commercial banks or savings banks were involved. This accords with the accepted conclusion among students of banking that competition in the metropolis is the keenest and most effective in the State. Competition for the supply of corporate funds The large corporation of today occupies a highly independent position in regard to bank loans. As a result, the banking industry competes vigorously for the opportunity of supplying funds for corporate expansion. Between 1939 and 1953, as the chart and table 14 illustrate, bank loans provided barely 3 percent of all sources of funds tapped by 300 large corporations in selected industries. The virtual autonomy of these firms was underlined by the fact that internal sources of funds, such as depreciation reserves, retained profits and tax accruals, provided almost three-quarters of total financial requirements. Mortgages, bonds, and capital stock, the primary domain of investment bankers, accounted for 16 percent, or over 5 times the amount of funds that banks were asked to provide. Clearly, the large corporation is able to call the tune in the matter of banking accommodation. And to repeat, it is precisely the large corporations on which the big New York City banks historically depend for the bulk of their business. SOURCES OF FUNDS 300 LARGE CORPORATIONS 1939 THROUGH 1953 TABLE 14.-Sources of funds, 300 large corporations in selected industries, 1939-53 NOTE.-Where any category was negative in any year, it was disregarded as a source of funds for purposes Sources: Federal Reserve Board of Governors, Financial Data for 300 Large Corporations-Special Competition for consumer loans Faced by the growing independence of corporations and by the bargain-basement interest rates emerging in an intensely competitive money market, banks in New York City, and throughout New York State, have been reaching out for direct consumer installment credit. No longer do banks confine themselves to wholesaling such credit to retail lenders, such as stores and finance companies. 41 |