Readings in Money and Banking Part 67

DOMESTIC BANKS

There are many important and successful banks in South American countries which are strictly domestic inst.i.tutions, not only incorporated under the laws of the country in which they do business, but owned and managed by local interests. The notion sometimes seriously put forward that South American banking is almost wholly in the hands of foreigners is quite unfounded. It is true that trading operations are generally handled either by foreign houses or by houses in which there is a strong foreign influence and that the financing of nearly all foreign trade and of much local trade is likely to go to foreign banks.

But the accounts of the rest of the domestic trading firms, of land owners, and of governmental corporations, as a rule, gravitate toward the domestic banks.

Following is an approximate statement of the total of deposits and credits in account current in each South American country on or about December 31, 1913, and an estimate of the distribution between foreign and domestic inst.i.tutions:

---------------------+-------------+------------------+------------------ Countries. | Total bank | In | In | deposits. | European banks. | domestic banks.

---------------------+-------------+------------+-----+------------+----- | | Amount. | Per | Amount. | Per | | |cent.| |cent.

| | | | | Brazil | $190,000,000| $78,000,000| 40|$112,000,000| 60 Uruguay | 42,500,000| 14,000,000| 33| 28,500,000| 67 Argentina | 626,000,000| 173,000,000| 28| 453,000,000| 72 Paraguay | 3,500,000| | | 3,500,000| 100 +-------------+------------+-----+------------+----- Total, east coast | 862,000,000| 265,000,000| 30| 597,000,000| 70 | | | | | Chile | 104,500,000| 29,500,000| 28| 75,000,000| 72 Bolivia | 8,800,000| 1,500,000| 17| 7,300,000| 83 Peru | 28,500,000| 7,500,000| 26| 21,000,000| 74 Ecuador | 4,000,000| | | 4,000,000| 100 +-------------+------------+-----+------------+----- Total, west coast | 145,800,000| 38,500,000| 26| 107,300,000| 74 | | | | | Colombia | 5,800,000| | | 5,800,000| 100 Venezuela | 6,200,000| | | 6,200,000| 100 +-------------+------------+-----+------------+----- Total, north coast | 12,000,000| | | 12,000,000| 100 | | | | | Total, South America |1,019,800,000| 303,500,000| 30| 716,300,000| 70 ---------------------+-------------+------------+-----+------------+-----

The great Banco de la Nacion Argentina (Bank of the Argentine Nation) is an official inst.i.tution, all the shares of which are owned by the National Government. It is a successor of the former national bank, which was driven into insolvency in the great financial crisis of 1890 and was afterwards liquidated. Although it was organised during a period of disaster and there were many prophecies of its certain failure, the Bank of the Argentine Nation has had a wonderful development and to-day ranks as the seventeenth in size among the great banks of the world.

The bank pays no dividends, but carries 50 per cent. of its profits to the credit of capital account and 50 per cent. to reserves. Entirely through this process the capital and reserve funds have increased from approximately $22,000,000 in 1892 to over $100,000,000 at the present time. During the same period deposits have grown from $21,000,000 to $205,000,000, and discounts and advances from $47,000,000 to $208,000,000. There are now more than 150 branches.

The bank differs from most other governmental inst.i.tutions in that it carries on distinctly a commercial banking business more or less in compet.i.tion with private commercial banks. Until the crisis of 1914 it did no rediscounting for other banks, and even during the crisis its activities in a.s.sisting other banks were much restricted.

LAND MORTGAGE BANKS

In several of the South American countries there is a well-organised system of land-mortgage banks following European models. In some cases the banks are owned and operated by the National Government and in other cases receive some special support or guarantee. The plan under which they all operate is the following: The owner of land who desires to raise money on mortgage approaches the bank and requests an investigation and appraisal, the expenses of which he usually pays. If the property is shown to be unenc.u.mbered with prior claims and meets other conditions, the bank delivers to the owner the mortgage bonds in convenient denominations up to a given proportion, usually 50 per cent., of the appraised value. These mortgage bonds are part of a series and are themselves secured, not by any specific piece of property, but by all the property covered by the series; they are also backed by the credit of the issuing bank. The owner of the property then offers the bonds for sale through a broker, and in this way obtains the desired funds. He pays the bank a small commission, from one-fourth of 1 per cent. to 1 per cent., for its services.

In Argentina, where this system is developed to its highest extent, these land-mortgage bonds are known as "cedulas," and are issued by the Banco Hipotecario Nacional (National Land Mortgage Bank). At the present time the Argentine "cedulas" tend to sell on a 7 per cent. basis, more or less.

Uruguay, Brazil, and Chile all have similar issues, which sell on bases ranging from 7 to 9 per cent. or even higher. Broadly speaking, and without attempting to a.s.sign a definite value to any one of these issues, they are sound, conservatively issued, well protected, and under normal conditions readily marketable. The more important issues have been widely sold in England, France, and Belgium. If they were properly introduced and made well-known in the United States, there is no reason to question their finding a good market here also.

Side by side with the land-mortgage banks there are operating in the Argentine a number of English mortgage companies, which directly invest their own funds in land mortgages and have earned highly satisfactory profits.

In several countries there are state-owned savings banks, a large portion of the funds of which also go into land mortgages.

CONDITIONS OF COMMERCIAL BANKING

A banking business, like any other, must adapt itself to surrounding conditions, including laws, business customs, precedents created by older banks, and the like. In South America these conditions differ in a number of respects from those which prevail in the United States.

Probably the first impression of most observers gives an exaggerated idea of the differences. However, they should be fully and carefully considered.

The chief differences that directly affect banking operations are the following: (1) Comparative absence of banking regulation on the part of governments or a.s.sociations; (2) national colonies; (3) social character of business relations; (4) lack of highly developed economic organisation; (5) relatively high and stable rates of interest; and (6) in some countries fluctuating currencies. The first five of these circ.u.mstances call for brief comment.

LITTLE CONTROL OR CO-OPERATION

Not only is there a marked absence of laws directly applicable to banking concerns, but there is also an equally noteworthy absence of control exercised either by the Government or by a.s.sociations among the banks. Even the large governmental or semi-governmental banks in Brazil, Uruguay, Argentina, Chile, and Bolivia are compet.i.tive with the other banks. Whatever influence they exercise is secured through their active and direct compet.i.tion, not through any special authority over the other banks conferred upon them. In the fall of 1914, for the first time, there was some rediscounting of the paper held by other banks on the part of the Bank of the Argentine Nation and of the Bank of the Republic of Uruguay; but this tendency did not go far. The other banks objected to placing information as to their relations with customers in the hands of the governmental inst.i.tutions. In other countries there has not been even this much of an attempt toward fulfilling the functions of a central bank of rediscount.

It is difficult to secure in most of the South American cities even the most elementary kind of co-operation among the banking inst.i.tutions. How is it possible that they should continue to stand apart when they would obviously gain so much by coming together? A partial answer is to be found in the peculiarity that has already been pointed out, namely, the fact that many of the more powerful inst.i.tutions are the offspring of European countries. Each one is fighting to support the trade of a certain well-defined group of clients. The national antagonisms among them are deep-seated and sometimes virulent. All this was true even before the European war. It will be tenfold true for a number of years to follow.

NATIONAL COLONIES

This leads to mention of the second condition, one which operates in favour of European-owned banks to the relative disadvantage perhaps of American banks. This condition is the presence in some of the large South American cities, notably Buenos Aires, of a large colony representing each one of several important European nations. Naturally the tendency of each colony is to support banks of its own nationality.

On the whole, although this matter of national affiliations is undoubtedly a factor to be reckoned with, it appears to be by no means decisive. The German banks, for instance, have been able to expand with much greater rapidity than we should have been justified in expecting on the basis of their national trade and national colonies alone. This is true likewise of the Italian and French banks. A great proportion of the business men of South America, even those of foreign origin, are governed less by their national sentiments than by their business interests.

PERSONAL CHARACTER OF BUSINESS DEALINGS

To an observer accustomed to European or American methods, one of the most striking features of business life in the South American cities is its strongly personal and social flavour. We are accustomed in this country to emphasise the principle that friends.h.i.+p is not a safe guide in business dealings. In South America the contrary is more nearly true.

Family ties are apt to be a controlling factor in choosing partners and employes. If one's ultimate object is to have business dealings with a firm, he must first cultivate the personal friends.h.i.+p of the head of the firm. Social relations and business relations become confused, and it is hopeless to expect the purely impersonal view of a business proposition that is considered correct in this country. Like all sweeping statements, this one is subject to exceptions. There are many American, German, and English firms, especially in Buenos Aires, which prefer what we denominate "businesslike methods," but they are not numerous enough to give the tone to business life.

This is a condition which directly affects banking practice. It makes it very difficult, for example, to introduce the custom of securing full financial statements from all applicants for credit. The request for a statement is apt to be construed (as was the case in this country not many years ago) as a reflection on the personal honesty and credit standing of the applicant. For the same reason it is difficult, and may frequently be poor policy, for a bank officer to ask a customer a direct question as to the status of his business. He is likely not to take an impersonal att.i.tude toward the question, but to resent it as if it were an attempt to pry into his purely personal affairs. Consequently, all business men, including bankers, are forced to rely to a great extent in estimating the credit standing of individuals and firms on their personal impressions, on such information as they are able to secure through indirect hints and questions and on the business gossip which they pick up. It must be remembered that, except for Buenos Aires, most of the business communities are comparatively small and isolated. There is little opportunity, therefore, for long-continued fraud. A man who shows traces of dishonesty is much more plainly marked than in larger communities. As a consequence, the lack of the machinery and the customs that we consider indispensable in extending credit does not prevent the formation of correct ideas as to the wealth and character of a business man.

UNDEVELOPED ECONOMIC ORGANISATION

Most of the South American countries, we should keep in mind, are still spa.r.s.ely populated and have no need for the elaborate machinery of trade and finance which exists in Europe and North America. The region farthest advanced in its economic development, the River Plate Basin, may be roughly compared to agricultural States like Iowa, Kansas, and Nebraska as they were thirty years ago. Farming methods are usually not economical. The small farmers have little money of their own, their lands are heavily mortgaged, and they are "carried" from one crop to another by the local general retailer, who makes advances to them both in goods and in money. The retailer must in turn secure liberal credits from wholesalers, who are in their turn partly "carried" by the banks.

There is no clear-cut distinction between dealers in commodities and bankers, for the dealers are forced to finance most of their own sales.

Such an arrangement of course favours extravagant credits, high prices, speculation, and crises, just as it did in the United States. It is rapidly giving way to a more complex organisation, in which the farmer has funds of his own, does his short-term borrowing at a bank, and pays cash for his purchases.

Without attempting to comment on intermediate grades of organisation we may consider briefly the manner in which trade and finance are conducted in the north coast countries. An officer of a bank there a.s.serts that banking in the north coast countries is not to any great extent a matter of handling currency or money funds. The intermediary system of brokers, merchants, and other middlemen between the producer and his market, to which we are accustomed, is lacking, and the banker must take the place of all of them. He must himself inspect and sell produce. Loans are made, for instance, secured by growing crops; the bank sends a man to the plantation to look over the coffee or cocoa, or whatever the crop may be, and report on its condition and prospects; to protect itself the bank sees that it is properly prepared for s.h.i.+pment, and takes care of the sale in the New York, London, or Hamburg market. The bank collects the proceeds and credits the customer with his share. Interest rates run from 8 to 15 per cent. and commissions for selling from 1 to 3 per cent.

INTEREST RATES

Interest rates average considerably higher--even making allowance for increased risk--in South America than in the United States. They are, however, much more stable and more uniform over the whole continent. The uniformity is no doubt to be ascribed chiefly to the large English and German banks, with their branches in several different countries and their ready access to European financial centres. The stability in rates over a period of years is presumably due in part to the relatively gradual development of banking, commerce, and production, so that sudden s.h.i.+fts in the demand for and supply of banking capital are not frequent.

There are, however, a number of exceptions to the general stability. In Argentina the crop-moving season creates, though to a much smaller extent, the same kind of extra demand for currency as in the United States, and tends to make some seasonal variations in discount rates.

They vary from as low as 6 per cent. to as high as 12 per cent., but do not normally move far from 8 or 9 per cent.

COMPENSATION OF DIRECTORATE

The German, French, Italian, Spanish, and many of the domestic banks, especially in Argentina and Peru, follow the European custom of compensating the home office directorate by allowing them a fixed percentage of the net profits. The president, manager, founder, and others may also be compensated in the same way. The net profits of the Banco Espanol del Rio de la Plata are distributed: 2-1/4 per cent. to certain specified charities, 1 per cent. to the founder, 12 per cent. to the reserve fund, 2 per cent. to the directors and managers, 2-3/4 per cent. to the fund for employes, 80 per cent. to the shareholders for dividends and dividend reserves; those of the Banco de Italia y Rio de la Plata: 1/2 per cent. to charity, 5 per cent. to the reserve fund, 7 per cent. to the directorate, 1-1/2 per cent. to the fund for employes, 86 per cent. to the shareholders. There is apparently no general rule which governs the distribution except possibly that the larger the bank the smaller is the percentage for the directorate and management. In England the directors are more likely to receive a fixed compensation.

Whether this plan of having a paid directorate works better than the American method of having a directorate made up usually of some of the larger shareholders, whose payment is purely nominal, is an open question. It is largely a matter of national custom.

CLa.s.sES OF BUSINESS OF FOREIGN BANKS

First. The foreign banks in South America usually start by devoting a large proportion of their energy and capital to operations in exchange.

Second. In this connection they purchase and make advances against commercial bills drawn on importers in the countries where they are doing business.

Third. At the same time the home office in London, Hamburg, or Berlin is probably developing a business in acceptances which involves comparatively little direct expense and allows considerable profits.

Fourth. All South American banks are called upon to handle collection of drafts and sometimes to take care of ordinary mercantile transactions, both on a commission basis.

Fifth. An activity which may be of some importance from the beginning consists of underwriting and selling securities.

Sixth. As quickly as possible the foreign banks build up a local account current and loan and discount business.

Seventh. Some of the banks, especially the German banks, have partic.i.p.ations in syndicates and in industrial enterprises.