Business: Northwest Wind

Straws show which way the wind blows. But when a strawstack is an indicator it tells tales of a wind that is blowing near hurricane strength. Last week 37 banks in Minnesota, North and South Dakota and Montana,—37 banks with over $350.000,000 of assets—were the strawstack at which the Northwest cocked an admiring eye. For the 3 7 banks were united in a great bank chain, headed by the First National banks of St. Paul and Minneapolis.

The chain-banking movement in the Twin Cities was started by Northwestern National Bank of Minneapolis which formed the $75,000,000 Northwest Bank Corp. and began picking up banks in the vicinity. Among its attempted acquisitions was First National Bank of Minneapolis. First National Bank of St. Paul, not intending to be left in the cold, started its own chain last spring, united 17 banks under one holding company. Last week’s union swallowed up the First National of St. Paul’s first effort, added 20 more banks, united all in a holding company headed jointly by the First Nationals of the two cities.

The new holding company, called First Bank Stock Corp., is designed to tie the banks of Minneapolis and St. Paul into the financial structure of the mining industries of the Northwest. Of its $250,000,000 capital stock some $70,000,000 is being issued in exchange for the controlling interest in the 37 banks. The remainder will be used for future expansion.

No one-city amalgamation is this chain. The list of its officers and directors is enough to show that the financial and business interests of a great part of the Northwest are united in it. President is George Harrison Prince, head of First National of St. Paul, native of Amherst, Mass., but acquainted with northwestern banking from the ground up. Now 68, he has spent 50 years of his life in the small and large banks of Minnesota. Vice President is Lyman Wakefield, head of First National of Minneapolis. The list of directors, incomplete last week, is to include the presidents of seven railroads. Chairman of the Board is Clive T. Jaffray, President of the SooLine (previously president of the First National of Minneapolis). Other railroad presidents already on the board are Ralph Budd, head of Great Northern, and Charles Donnelly, head of Northern Pacific. Besides bankers of four States (including James E. Woodward, president of Metals Bank of Butte and Sam Stephenson, president of First National of Great Falls) the board will number leading industrialists. Among those already chosen are John D. Ryan, Cornelius F. Kelly, and L. O. Evans, respectively the chairman, president and general manager of Anaconda Copper Mining Co., gigantic producer and fabricator not only of copper, but zinc, lead, silver, gold, antimony, arsenic.

The foundation of this large bank chain is not to be confused with the type of bank merger which goes on in large cities. In the typical example of the latter, a large bank buys up one or more small banks, absorbs them in its corporate structure. The offices of the absorbed banks become branches of one central bank. The operation of such a merged unit is called branch banking. The Twin City organism will practice not branch but chain banking. These two types of banking are not only quite distinct, they are considered by some to be opposed, and there is a hot debate pro and con as to the merits of each system.

National banks are now permitted by law to have branches within the corporate limits of their cities, and branches abroad, but are not allowed to have branches out-side of their cities in the U. S. Some state laws, notably California’s, permit state-wide branch-banking. But no law, state or Federal, allows for the formation of great banks with branches in more than one state, such as the great banks of Canada and England.

It is in part to get around this legal limitation that bank chains such as First Bank Stock Corp. are formed. A holding company acquires control of several banks, operates them under a unified policy. The bank or banks at the head of the chain act as correspondents and depositories of the reserves of the members, all of which retain their individual identity. The important differences in practice are these:

1) A person doing business with a chain bank does business with that particular bank alone. His deposits are secured by its assets alone. But a person doing business with a branch bank is in effect doing business with all branches, and his deposits are secured by their combined assets.

2) One bank of a chain can (and on occasion has*) failed without affecting the solvency of the other banks of the chain, but no branch of a branch bank fails unless the whole bank is submerged.

Both these systems have obvious advantages and disadvantages. If you are a small country banker who does not want to be swallowed up by a large bank, you will probably see that a chain bank remains a local bank with the interests of its neighborhood at heart; that branch banking is likely to result in financial monopoly; that incompetence or dishonesty in a few high places can ruin a whole branch banking system. If you are a large city banker wishing to expand, you will very likely see that a branch bank can be of more assistance in time of trouble because its risks are spread over wide area; that in branch banking credit is very liquid so that it can find in any one locality as much as may be required, bringing the funds if necessary from afar; that management is much more likely to be competent and honest in a few strong hands than in many weak ones.

Certain it is that the branch banking advocates will try to have the law modified to permit branch banking throughout the country. If they succeed, it is certain that some of the chains now being created will be converted into branch banking systems. But whether chains or branches eventually come out on top, the developments in the Northwest last week show clearly the tendency of modern banking not only to step outside of municipal boundaries, but to cross state lines. That was where last week’s wind was blowing.

*An instance is reported in which a chain deliberately concentrated all its poor assets in one of its members and allowed it then to fail, preserving its good assets in the hands of other members.