368
8
(d) Apart from the natural appreciation or depreciation of invest- ments in redeemable securities, which is represented by the difference be- tween their running and effective yields, the current values of investments are liable to constant changes with the ups and downs of the stock market, and these changes also affect the surplus or deficit shown in the balance sheet.
re-
(e) It is clearly prudent to build up and to retain a
the invest- serve against the possible market depreciation of ments. The extent to which such a reserve is called for cannot be measured by any exact formula, and varies with the circumstances; a larger percentage is required, for instance, for long-term than for short- term stocks, and a larger percentage also when the level of interest rates is low than when it is high. In the case of certain Colonial currency note security funds recently reviewed by the Secretary of State, 10 per cent. of the note issue has been fixed as a standard reserve, but the possible inadequacy of this percentage in some circumstances is recognized by the provision that surpluses in excess of it can only be transferred to general revenue with the Secretary of State's approval.
(f) When the annual balance sheet shows not a surplus but a deficit of assets in comparison with liabilities, the deficit is a contingent liability of the Government under its guarantee to the depositors; but such a deficit may be due to a sudden fall in the prices of securities, which may be expected to right itself on the return of more normal market conditions, and there is, in our opinion, no need to make it good at once, either in whole or in part, out of Government revenues or surplus funds, unless its proportion to the deposits is so striking as to endanger confidence or to cause serious embarrassment to the Government in the event of large with- drawals. The question should be considered in each case on its merits. 24. We believe that the method which we now proceed to formulate for regulating the relations between savings bank funds and the public revenues gives due weight to the foregoing considerations and preserves a reasonable balance between the immediate interests of the taxpayer and his ultimate responsibility for the security of the bank's financial position, although, in view of the widely varying conditions under which different banks operate, we do not wish it to be understood that we recommend it as one to be necessarily applied in all cases.
SUGGESTED METHOD OF DEALING WITH SURPLUSES AND DEFICITS ON REVENUE AND EXPENDITURE ACCOUNT. 25. In the first place we suggest that any surplus on the revenue and ex- penditure account of a savings bank should normally be absorbed in the bank's capital account, in order that an adequate reserve against depreciation of invest- ments may gradually be built up; for the same reason, and with the additional object of compelling the attention of the Executive and Legislature, any de- ficiency on the revenue and expenditure account should be met by payments out of the public revenues. In the accounts of the Colonial Government any such payments should be treated as final expenditure and in the accounts of the savings bank as revenue, but they should be regarded as advances free of interest, and the aggregate amount of any such advances outstanding should be shown in a footnote appended to the balance sheet of the bank as a contingent liability. (It will be appreciated that such advances are in an entirely different category from the temporary advances by the Treasury referred to in paragraph 12 above.)
26. When the necessary reserve has been established, and provided that it is maintained, we consider that any surplus on the revenue and expenditure account should be applied towards repayment of any outstanding advances from public revenues; if there are no advances outstanding, we see no objection to the appro- priation of any such surplus as a direct contribution to public revenues. In the event of any savings bank showing year after year an appreciable surplus which is being appropriated in this way to public revenue, and which appears likely to be maintained, it would no doubt be considered by the competent authorities whether, consistently with the principles already formulated, the rate of interest on deposits might be increased.
27.
9
It will no doubt happen in the case of a bank the bulk of whose funds is invested in securities standing above par and giving a flat yield well above the rate of interest payable to depositors that there will be a surplus on the revenue and expenditure account, but that the normal depreciation of the in- vestments year by year will, unless counteracted, reduce the reserve below the prescribed level. In such a case our suggested procedure provides that no portion of the surplus income can be transferred to the public revenue until the reserve has been re-established.
SIZE OF RESERVE.
As
28. We have now to consider what should be the prescribed reserve. we have already stated, it is impossible to predetermine by formula the exact size of the reserve which is called for in all circumstances, but, for the limited purpose of settling the disposal of surpluses and deficits on revenue account, we consider that a reserve amounting to 15 per cent. of the bank's liabilities to depositors might be regarded as reasonable; that is, that the total assets of the bank should exceed the total liabilities by not less than 15 per cent. of the liabilities to depositors. (The total liabilities will include, besides liabilities to depositors, such items as temporary advances from the Treasury, or an Exchange Reserve such as is mentioned in paragraph 13 above.) While it must be admitted that this figure is more or less arbitrary, we believe, after a review of the position, that it will be found satisfactory in practice. We have thought it advisable to fix a somewhat higher standard than the minimum of 10 per cent. referred to in paragraph 23 (e) above, in view of the fact that a currency note security fund is free from any liability comparable with the obligation of the savings bank to pay interest on deposits.
DEFICITS AND SURPLUSES ON CAPITAL ACCOUNT.
29. We have already indicated (in paragraph 23 (f) above) that in our opinion it is not necessary in all cases to make good at once a deficit on capital account, but we consider that the position of the bank should be reviewed by the Governor and the Secretary of State in every case in which an appreciable deficit is disclosed by the balance sheet. When there is a deficit, a reference to this contingent liability should appear in a footnote in the Colony's Statement of Assets and Liabilities.
30. It may sometimes arise that the bank's assets, through appreciation in the value of securities held, exceed its deposit liabilities by considerably more than the prescribed margin of 15 per cent. On examination it will frequently be found that such appreciation can only be regarded as purely temporary, but we can conceive cases in which the assets are in excess of the amount reasonably required to be held against the liabilities of the bank. We suggest that, in such a case, a careful examination of the position should be made from time to time, say every three or four years, and if it were found that such a surplus of assets existed, we should not think it in any way improper that any sum adjudged to be surplus should, subject to the prior approval of the Secretary of State, be appropriated towards repayment of any outstanding advances from public revenues of the nature referred to in paragraph 25, or even as a contribution to public revenues.
31. In section 13 of the draft Ordinance attached to this report we have set out the provisions which appear to be necessary if the procedure described in the preceding paragraphs is adopted. The method of treatment of the accounts is exemplified in Appendix B.
LIMITS ON DEPOSITS.
32. We turn now to a question to which we referred incidentally in para- graphs 1 and 19 above, namely, the possible utilization of the savings bank for deposits which are not genuine "small savings", but which may be temporarily attracted from other and more suitable channels in certain circumstances. It has already been shown that the presence of such uneasy money
in any
369