Banks Aim At Liquidity

It says a good deal for the strength of the British banking system that in face of trade-recession and political events which caused a huge efflux of funds from the London money market, it succeeded last year in preserving its liquidity on the one hand and a satisfactory profit-earning capacity on the other. From the bank-chairmen's speeches it is clear enough that during the political crisis the compromise between liquidity and profit-earning, normally achieved as a by-pro- duct of what is now considered ordinary British banking practice, involved rather more conscious deliberation and, as one would imagine, those in control had no hesitation in buttressing the liquid position even if it cost something in the way of profits. That shareholders have little to complain about, however, is evident from the fact that nearly all the big banks have maintained their 1937 rates of distribution, while there have been one or two increases.

EARNINGS AND TAXATION

Nobody expected that the banks would show higher profits last year than for 1937 and, in fact, the published figures were, in the aggregate, moderately lower. Taxation, including National Defence Contribution, called for substantially larger sums and if one adds back the tax, one finds that the gross earnings showed very little change. Even so, however, the resultant figures do not provide an accurate measure of the change in the real earnings of the banks, the published totals always being subject to " policy " considerations. Although the general experience in the matter of bad debts—normally an important influence on policy in arriving at banking pro- fits—was favourable last year, I suspect that profits were struck rather more conservatively than in 1937. That is a reasonable assumption in view of the general political and trade uncertainties at the beginning of this year.

DEPOSITS AND ADVANCES

In many quarters considerable stress has been laid on the fact that last year, for the first time since 1933, there was a contraction in bank deposits. One wonders whether too much is not read into the end-of-year figures. They show a decline from the end-1937 total of roughly 4 per cent.—a clear reflection, in almost but not quite every case (e.g., Lloyds) of the withdrawal of foreign money. But if one takes the average level of deposits during the year based on the monthly returns, which is a better guide to the year's experience than end-of-year comparisons affected by for- tuitous influences, one finds that deposits were substantially unchanged.

Again, the end-of-year comparison of advances is slightly misleading. The figures are as follows:

LOANS AND ADVANCES

Dec. 31st, 1936.

£ Dec. 31st,

1937.

£ Dec. 31st,

1938.

£ Barclays Bank... 179,665,01z 196,264,896 199,452,980 Lloyds Bank ... 149,278,901 170,844,026 163,585,910 Midland Bank... ... 189,265,053

207,947,787

209,050,04z

National Provincial Bk.

122,077,391

140,445,454

139,586,104 Westminster Bank

125,336,406

136,405,289

134,044,384

District Bank ... 27,398,273 30,834,823 32,583,940 tartins Bank ... 41,277,079

42,420,141 44,421,602

';ational Bank...

15,551,990

16,631,853

17,273,932

Union Bank of Man- chester ... 8,918,032 10,049,171 9,082,925

Williams Deacon'sBank 11,955,042

14,356,872 14,175,044 Total 870,723,178 966,200,312 963,216,862

Aggregate advances—there are interesting deviations in ex- perience—were only very slightly below the high level estab- lished at the end of 1937 which suggests that the demand for accommodation was scarcely affected by the falling off in business activity and the lower range of commodity prices. The truth is, however, that the year-end comparison obscures the fact that advances were steadily rising throughout 1937 and until March of last year. Since that time there has been a fairly sharp contraction.

INVESTMENTS DOWN

In the ordinary way a declining volume of advances finds its counterpart in an expansion of the banks' holdings of in- vestments, but this took place only to a small extent in 1938. So far from increasing, the aggregate holdings of invest- ments were actually rather lower at the end of last year, as the following table shows :

INVESTMENTS

Dec. 31st, 1936. Dec. 31st,

1937-

Dec. 31st, 1938.

Barclays Bank ...

109,367,472 102,423,395

96,876,802 Lloyds Bank I 16,127,481 114,002,646 107,907,289 Midland Bank 127,892,038 1 17,386,191 118,869,021 National Provincial Bk. 88,262,433 88,443,622

83,357,529

Westminster Bank ...

II 1,056,812

112,012,995 112,186,133 District Bank ... 29,398,248 29,621,613 28,986,586 Martins Bank 32,814,071 31,392,280 33,564,780 National Bank ... 15,380,108 14,314,768 15,067,560 Union Bank of Man-

cheater 2,091,907 2,077,694 2,077,693 Williams Deacon's Bank 12,878,342 11,504,635 11,561,672 Total 645,268,912 623,179,839

610,455,065 As between the various banks there were considerable dif- ferences in policy, but it is possible to detect from the general trend of the figures a fairly widespread unwillingness to en- large already substantial commitments in gilt-edged stocks. From the high point reached in 1937 the banks' gilt-edged portfolios have fallen by some £55,000,000, but they are still abnormally high. What is more, they amount, when added to advances, to over 69 per cent. of deposits. The banks thus working very close to their conventional maximum r Jtio of advances plus investments to deposits of 70 per cent.

GOLD AND BILLS

Apart from the fall in deposits during the last half of the year, the efflux of gold has left its mark on banking figures most clearly in the contraction of money market assets. As the gold held against " hot " money was financed by the Exchange Equalisation Account principally by the sale of Treasury Bills to the market it is not surprising that the chief counterpart of the shrinkage in bank deposits was a reduction in bills and in money at call. The extent of the reduction in bill portfolios is shown below : Buis DiscouhrrEn Dec. 31st.

1936. Dec. 3Ist, 1937- Dec. 31st.

1938.

Barclays Bank ... 591248,252 50,362,681 54,594,153 Lloyds Bank ... 45,070,460 43,017,115 40,955,247 Midland Bank ... 74,413,998 83,158,554 48,498,810 National Provincial Bk. 44,190,103 35,490,435 32,189,714 Westminster Bank ... 44,741,280 31,781,304 40,942,785 District Bank ... 6,533,395 5,479,737 6,201,704 Martins Bank ... 1,284,450 1,290,443 1,413,708 National Bank ... 1,549,675 1,490,680 1,406,938 Union Bank of Man- chester ... 360,933 341,327 258,425 Williams Deacon's Bank 2,499,609 2,085,549 1,564,094 Total 279,892,155 254,497,825 228,025,578 The aggregate decline is over £26,000,000, or a little more than 10 per cent., to the lowest level reached since 1931. Who can wonder that several of the bank chairmen, and notably Mr. Fisher, of Barclays, have stressed the desirability, in the interests of the banks' liquidity, of official action to expand the supply of Treasury Bills? In the light of the Chancellor's decision to borrow £350,000,000 for defence in the coming financial year, I am prepared to look for a gradual—but in the long run quite substantial—rise in the floating debt which will relieve this particular problem of the banks. But I should also expect that at a later stage the banks 'themselves will have to take up additional stock in the form of short and medium-dated Defence loans. Merely by allowing their cash ratios to fall to Iol per cent. the banks could shoulder both tasks without any very substantial addi-