Purpose and effectiveness of bank examination in late 19th and early 20th century America

This study offers some initial findings of a National Science Foundation (NSF)-funded panel study of bank examinations in New York City from 1887-1902, set against the regulatory framework of the period and the resources and mission of the Comptroller of the Currency. The new and unique data set was obtained from the examinations deposited by the Comptroller of the Currency in the National Archives. Each examination provided a balance sheet plus additional details on assets, liabilities and capital, management, governance, regulatory violations, with explicit comments about any problems and how they might be resolved. In addition, there was information on the length and intensity of the examinations. The hand-written examinations were photographed and then coded by a research team. Although over a century old, many of the issues that concerned examiners and the Comptroller are recognizably modern. The initial analysis includes an assessment that assigned a CAMELS-like (capital, assets, management, earnings, liquidity, sensitivity) rating to each bank at the end of the examination. Examiners often found that banks were in violation of their reserve requirements and the limits on loan size. However, they were not overly concerned by these transgressions and instead focused most of their criticism on issues of governance, particularly the failure of the directors to ensure the quality of senior management, and problem loans. By independently identifying the problem loans in banks’ portfolios, examiners pressured management to write them off in an orderly process. The result was that, although the 1890s was a decade of banking panics and bank failures, most troubled New York banks were either merged with stronger institutions or liquidated with very small losses to depositors and other creditors.