• TABLE OF CONTENTS
HIDE
 Title Page
 Dedication
 Foreword
 Table of Contents
 List of Tables
 An overview
 Institutional strengthening
 Commercial banking
 Rôle of non-commercial banks
 Looking ahead
 Appendix
 Index






Title: Banking growth in Puerto Rico
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 Material Information
Title: Banking growth in Puerto Rico
Physical Description: xii, 161 p. : ; 22 cm.
Language: English
Creator: Di Venuti, Biagio, 1904-
Publisher: Waverly Press
Place of Publication: Baltimore
Publication Date: 1955
 Subjects
Subject: Banks and banking -- Puerto Rico   ( lcsh )
Genre: non-fiction   ( marcgt )
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Bibliographic ID: UF00076959
Volume ID: VID00001
Source Institution: University of Florida
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Resource Identifier: aleph - 000132994
oclc - 26656315
notis - AAP9028

Table of Contents
    Title Page
        Page i
        Page ii
    Dedication
        Page iii
        Page iv
    Foreword
        Page v
        Page vi
    Table of Contents
        Page vii
        Page viii
        Page ix
        Page x
    List of Tables
        Page xi
        Page xii
    An overview
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
    Institutional strengthening
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
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        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
        Page 25
        Page 26
        Page 27
    Commercial banking
        Page 28
        Page 29
        Page 30
        Page 31
        Page 32
        Page 33
        Page 34
        Page 35
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        Page 72
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        Page 74
        Page 75
        Page 76
        Page 77
        Page 78
    Rôle of non-commercial banks
        Page 79
        Page 80
        Page 81
        Page 82
        Page 83
        Page 84
        Page 85
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        Page 97
        Page 98
        Page 99
        Page 100
        Page 101
        Page 102
    Looking ahead
        Page 103
        Page 104
        Page 105
        Page 106
        Page 107
        Page 108
        Page 109
        Page 110
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        Page 140
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        Page 142
        Page 143
        Page 144
    Appendix
        Page 145
        Appendix A. Earnings, expenses, and dividends of selected size groups of insured commercial banks in the United States (Continental U.S. and other areas) and of locally-chartered insured commerical banks in Puerto Rico, 1952-1953
            Page 146
            Page 147
            Page 148
            Page 149
        Appendix B. Ratios of earnings, expenses, and dividends of selected size groups of insured commerical banks in the United States (Continental U.S. and other areas) and of locally-chartered insured commerical banks in Puerto Rico, 1952-53
            Page 150
            Page 151
            Page 152
            Page 153
        Appendix C. Principal correspondents of commonwealth chartered commercial banks
            Page 154
            Page 155
        Appendix D. The government development bank for Puerto Rico, comparative statement of condition, 1940-1964
            Page 156
            Page 157
            Page 158
    Index
        Page 159
        Page 160
        Page 161
Full Text







Banking Growth

in Puerto Rico

by
B]I'AGIO DI VENUTI, Econ.D.
Financial Consultant
Department of The Treasury
Commonwealth of Puerto Rico


1955


























Copyright 1955 by
Commonwealth of Puerto Rico
All rights reserved























Manufactured in the United States by
WAVERLY PRESS, INC., Baltimore, Md.

























To My Father

Emilio Di Venuti







FOREWORD


The modernization and expansion of banking and closely related
financial institutions hold great promise as contributory factors to
the acceleration of economic development. As Secretary of the Treas-
ury of the Commonwealth of Puerto Rico, I have devoted consider-
able attention to this phase of developmental policy. I have inter-
preted the responsibility of the Secretary of the Treasury towards
financial institutions to extend far beyond the mere narrow super-
visory and regulatory functions, which I retain by law over the
banking institutions of Puerto Rico. In an economy dedicated to the
expansion of its economic growth, the government must inspire,
guide and aid the financial institutions of its jurisdiction.
To implement such a policy better and further, there should be
periodic pauses to examine what has been achieved, what remains
to be done and the best possible approaches for future action. In 1949
when I became Secretary of the Treasury, I had the benefit of Pro-
fessor Biagio Di Venuti's "Money and Banking in Puerto Rico" to
guide me in the formulation of the Treasury's banking and financial
policies.
Almost six years have elapsed since that time and in those years
considerable changes and modernizations have been made in the
legal nature of these institutions and in their actual procedures
and practices. Therefore, the Department of the Treasury has con-
sidered it worth-while at this stage to review the changes and develop-
ments during these years. To that end I retained Professor Di Venuti
of Georgetown University to prepare an analysis on banking in
Puerto Rico, to review all recent events and to point out some of the
likely courses for future action.
This study is not a statement of Treasury policy. It is a personal
statement by a professional and experienced economist of his ob-
servations on banking in Puerto Rico. It is published in the expecta-
tion that it may help all concerned-those within the confines of the
Commonwealth, in the United States, and perhaps in other quar-
ters interested in the study of the processes of economic develop-
ment-to become acquainted with what the stage and policies of
banking in Puerto Rico are like in 1954 and the relationship of
changes in this important institutional sector of the Puerto Rican
economy with our program of economic development.
San Juan S. L. DESCARTES
Puerto Rico Secretary of the Treasury
September 1954 Commonwealth of Puerto Rico








TABLE OF CONTENTS


BANKING GROWTH IN PUERTO RICO
Page
Foreword by S. L. Descartes, Secretary of the Treasury ........ v
Chapter I. An Overview
Introduction ................... ............... ..... 1
Present Banking and Credit Facilities. .................... 3
The Economic Setting .................................. 4
Chapter II. Institutional Strengthening
Keeping Apace of Economic Development ................. 7
Strengthening of Banking Code .......................... 7
Insurance of Bank Deposits ................. .......... 9
Improved Supervision and Examination................... 10
Establishment of Cash Depot .................. ......... 13
Overhauling of Clearing Mechanism....................... 18
Creation of Finance Conference .......................... 27
Chapter III. Commercial Banking
Structural Aspects of Commercial Banking ................ 28
Banking Offices................................... 28
Branch Office Banking................. ............. 33
M multiple Area Service Units............................ 35
Operational Aspects of Commercial Banking ............... 38
Bank Debits........................................ 39
Net Asset Increase. ................. ................ 40
Bank Deposit Rise. ................... ............... 42
Strengthened Capital Structure................ ....... 47
Loan Expansion .................................. 50
Investment Activity ................ ................ 55
Banking Reserves ... ................. .. ............ 59
Bank Earnings, Expenses, and Dividends ................ 67
Chapter IV. Rl6e of Non-Commercial Banks
Components................................. .......... 79
The Government Development Bank.................... 80
Fiscal Agency Functions .................. ........ 82
The Loaning Function ........................... 87
The Puerto Rico Bank for Cooperatives................. 88
Commonwealth Chartered Credit Unions ................ 90
The Government of Puerto Rico Employees Association
(Savings and Loan Fund)........................... 90






CONTENTS


Page
Units of Federal Farm Credit Administration .............. 91
Federal Land Bank of Baltimore.................... 91
Federal Intermediate Credit Bank of Baltimore......... 93
The Baltimore Bank for Cooperatives ................. 94
Puerto Rican Production Credit Association.............. 94
The Farmers Home Administration ..................... 95
The Federal Housing Administration .................. 96
The Federal Savings and Loan Association ............... 97
United States Postal Savings System............'.... 99
The Reconstruction Finance Corporation ................ 100
Small Business Administration........................ 101
Insurance Companies............ .............. 102
Chapter V. Looking Ahead
Additional Requirements in Field of Banking and Finance .... 103
Closer Operation of Bank Credit Mechanism with Federal
Reserve.......................................... 104
Influence of Federal Reserve on Puerto Rican Economy.. 105
The R61e of Correspondent Banks ................... 109
The Seasonal Borrowing Problem ..................... 111
Linking Commonwealth Banking Mechanism with Fed-
eral Reserve. ................ .................. 113
R6le of Development Bank in Linking-up Process...... 118
Synchronization of Commonwealth-Mainland Credit
Conditions ..................................... 119
Need for an Agency of Federal Reserve Bank of New York... 120
Normal Central Banking Facilities Not Available to Puerto
Rico........................................ ...... 121
What a Federal Reserve Agency Could Accomplish........ 123
U. S. Foreign Policy Implications of an Agency in Puerto
Rico................ ..... .... .............. 127
An Agency Would Serve Both the Federal Reserve and the
Commonwealth Economy. .......................... 127
Par Clearance and Fund Transfers ...................... 128
Some Background Detail on Par Clearance ............... 129
Exploration of Par Clearance Problem .................. 132
Requirement of Puerto Rican Bank as Non-Member Par
Remitting Institution ............................... 133
Need for Mutual Savings Banks ................ ......... 134







CONTENTS


Paqe
Need for Investment Companies .......................... 136
Need for Factor's Lien Statute .......................... 138
Need for an Accounts Receivable Statute .................. 140
Need for a Trust Receipts Statute ....................... 141
Need for Usury Statute................... ....... .. 143
Need for Small Loan Statute............................ 143
Need for Statute Governing Personal Loan Operations of
Banks .................... ... ................. 143
Appendix A. Earnings, Expenses, and Dividends of Selected
Size Groups of All Insured Commercial Banks in U. S., and of
Locally-Chartered Insured Commercial Banks in Puerto Rico,
1952-1953 ........................................... 146
Appendix B. Ratios of Earnings, Expenses, and Dividends of Se-
lected Size Groups of All Insured Commercial Banks in U. S.,
and of Locally-Chartered Insured Commercial Banks in
Puerto Rico, 1952-1953 .................... ............. 150
Appendix C. Principal Correspondents of Commonwealth Char-
tered Commercial Banks................................ 154
Appendix D. The Government Development Bank for Puerto
Rico, Comparative Statement of Condition, 1949-1954...... 156
Index ........... .......... .... ......... ............ 159









TABLES

Number Pae
1 Plants of New Industries Starting in Puerto Rico Since
1942 .......................... ................. 5
2 Insured Deposits of Commonwealth Chartered Commercial
Banks, as of Date of Examination in 1952................ 10
3a Shipments by U. S. Treasury to Cash Custody Account
During Fiscal Year Ended June 30, 1954 ................ 16
3b Currency in Cash Custody Account, July 1952-June 1954.. 16
4 Settlement Sheet of a Clearing Bank.................... 22
5 Reconcilement Statement of Bank Clearings............. 23
6 Location of Commercial Banking Offices.............. 29
7 Relative Size of Commercial Banks Operating in Puerto
Rico......................... .............. 32
8 Bank Debits in Puerto Rico, 1944-1954.................. 40
9 Total Net Assets of Commercial Banks, for Selected Years.. 41
10 Total Deposits (Public and Private), for Selected Years... 43
11 Public Deposits in Puerto Rico, 1943-1953............... 44
12 Private Deposits of Commercial Banks, for Selected Years.. 45
13 Private Deposits of Commercial Banks, by Class, for
Selected Years. ................ ....... ........ 46
14 Capital, Surplus and Undivided Profits of Commonwealth
Chartered Commercial Banks, for Selected Years ......... 48
15 Capital-Deposit Ratios of Commonwealth Chartered Com-
mercial Banks, 1949-1953......... ........ .......... 48
16 Ratio of Book Capital to Net Total Assets of Common-
wealth Chartered Commercial Banks, 1949-1953.......... 50
17 Total Loans of Commercial Banks, for Selected Years..... 51
18 Commercial Banks: Loanable Deposits and Loans as of
May 31, 1953 .................................... 52
19 Loans and Discounts, by Classes, of All Insured Commer-
cial Banks (Commonwealth Chartered and National Banks)
in Puerto Rico, June 30 and December 31, 1953.......... 54
20 Investments of Commercial Banks, for Selected Years..... 56
21 Government of Puerto Rico Deposits and Investments of
Commercial Banks, as of May 31, 1953 ................. 58







TABLES


Number Page
22 Security Portfolio of Insured Commercial Banks in Puerto
Rico, as of June 30 and December 31, 1953.............. 59
23 Legal Reserve Position of Commonwealth Chartered Com-
mercial Banks, 1947-1953 ........................... 62
24 Sources and Disposition of Total Income of Commonwealth
Chartered Commercial Banks, 1952 and 1953............. 68
25 Officers and Employees of Commonwealth Chartered Com-
mercial Banks, Number and Wages, 1952 and 1953........ 72
26 Net Profits After Taxes and Average Total Capital Ac-
counts of Insured Commercial Banks, 1953............... 74
27 Summary of Government Development Bank Financing
for the Commonwealth, the Municipalities, and Instru-
mentalities, July 1944 through June 1954................ 84
28 The Puerto Rico Bank for CoSperatives. Loans Granted
(Cumulative) and Outstanding, June 30, 1954............ 89
29 Postal Savings in Puerto Rico, for Selected Years........ 99
30 U. S. Treasury Balances in Puerto Rican Banks, as of
March 31, 1954....................................... 125
31 Data on Accounts Receivable and Inventories of Partner-
ships and Corporations, as of December 31, 1952.......... 139










CHAPTER I


AN OVERVIEW

INTRODUCTION
The record of the island's banks and credit institutions during the
past few years is one of growth and significant contribution to the
economic expansion program sponsored by the Commonwealth
Government. Those responsible for the direction and the supervision
of these institutions show clearly their awareness of the fact that a
maximum return from the employment of the island's productive
factors can be realized only if the economy is serviced by a sound
and effective financial and credit mechanism. To this end, a number
of fundamental improvements have been introduced, including the
insurance of bank deposits, modernization of the banking law, im-
provement of bank examination and supervision procedures and
techniques; also, the successful launching of a check clearing arrange-
ment with settlement through the Government Development Bank
on the books of the Federal Reserve Bank of New York, the over-
hauling of outmoded and costly procedures of servicing the currency
and coin requirements of the island, and furtherance of the profes-
sional competence of government technicians with responsibilities in
banking and financial matters.
It is understood by the Commonwealth leadership that progress
is a continuing process and that much more remains to be accom-
plished. For example, the clearing facilities are still in need of further
improvement, with the desired goal yet to be attained, namely, the
establishment of a central clearing agency in which all of the island's
banks and branches participate. Similarly, the arrangement for
supplying the Commonwealth's requirements for currency and coin,
although it represents a marked improvement over the antiquated
procedure of yesteryear, is still cumbersome and inadequate.
Also recognized is the need for introducing into Puerto Rico addi-
tional institutions and facilities essential to a program of economic
expansion of the magnitude and intensity now being pursued in the
Commonwealth. For instance, the island's banking and credit mecha-
1







BANKING GROWTH IN PUERTO RICO


nism is yet to be effectively synchronized with that of the Federal
Reserve. There are a few tie-ins with the Federal Reserve but these
are limited ones, such as (a) that of the national banks in Puerto
Rico which, through their main offices in New York City, are directly
linked to the System; (b) that of the Government Development
Bank, through the Federal Reserve Bank of New York, for the ex-
pressed purpose of settling clearing balances of local banks; and (c)
that of Banco de Ponce, which maintains, but makes very limited
use of, a non-member clearing account with the Federal Reserve
Bank of New York. Beyond these, the connections with the Federal
Reserve are very indirect, mainly by way of correspondent member
banks. In this general connection it might be added that Puerto Rico
is definitely hampered by its lack of, or inaccessibility to, the normal
financial mechanisms and procedures available to United States
citizens, business men and bankers on the mainland, where they are
served by a conveniently located Federal Reserve Bank or branch.
The local economy also lacks at present the facilities of specialized
lending agencies serving the functions of factoring, acceptance, and
discounting of assets arising in the process of production and distribu-
tion. Another financial mechanism yet to be introduced into Puerto
Rico is the investment company, an institution which has proved so
important in the rapid development of modern societies. Missing, too,
are mutual savings banks, whose usefulness in the saving-investment
process is now well established in many jurisdictions on the mainland.
In a number of instances the immediate requirement is for legisla-
tion which will permit and encourage the establishment in Puerto
Rico of financial institutions and facilities such as those mentioned
above. Aside from the provisions of the Commonwealth's Banking
Code which authorizes the establishment, operation and supervision
of commercial banks and trust companies, there is no provision in the
Puerto Rican statutes for the organization of financial institutions
other than insurance companies. Steps to remedy such deficiencies,
however, are now beginning to take shape, based in part upon a survey
conducted for the Government Development Bank in 1952.1 Details
in this respect are examined later in this text.
I "Preliminary Survey of Financial and Related Laws in Puerto Rico" by
Alphonse A. Laporte. The Government Development Bank for Puerto Rico,
August 1952.







AN OVERVIEW


PRESENT BANKING AND CREDIT FACILITIES
Today, there is a number of banking and credit institutions operat-
ing in Puerto Rico. Some of the more important of these include:
(a) Those subject to Commonwealth jurisdiction:
(1) Eight Commonwealth chartered commercial banks.2 These
institutions are members of the Federal Deposit Insurance
Corporation.
(2) The Government Development Bank for Puerto Rico.
(3) Two Canadian commercial banks.
(4) The Puerto Rico Bank for Co6peratives.
(5) Eighty-two Puerto Rican chartered credit unions.
(6) The Government of Puerto Rico Employees Association
(Savings and Loan Fund).
(b) Those subject to Federal Government jurisdiction.
(1) Branches of two New York city national banks. Both are
members of the Federal Deposit Insurance Corporation and
the Federal Reserve System.
(2) Units of the Federal Farm Credit Administration. These
include a Federal Land Bank and one National Farm Loan
Association, the largest in the United States; a Federal Inter-
mediate Credit Bank; a Bank for Co6peratives; a Production
Credit Corporation; one Production Credit Association, the
largest in the United States; and an office of the Commodity
Credit Corporation.
(3) A unit of the Farmers Home Administration.
(4) Agencies of the Home Finance Agency, including an office of
the Federal Housing Administration, the second largest in
the United States; and an institution operating under the
general supervision of the Home Finance Agency, namely,
the First Federal Savings and Loan Association of Puerto
Rico.
(5) The United States Postal Savings System.
(6) The Reconstruction Finance Corporation (now in process of
liquidation).
(7) The Small Business Administration.
2 Since the writing of this text, one of these institutions, the Credit Union
Bank, has been merged with Banco Popular.







BANKING GROWTH IN PUERTO RICO


A full discussion of the historical, structural and operational
aspects of the institutions previously listed, covering the period
through 1948, is to be found in the author's earlier volume entitled
"Money and Banking in Puerto Rico." This present text brings the
picture up-to-date.
THE ECONOMIC SETTING
The status of the Commonwealth of Puerto Rico within the federal
government system is defined and established by the Constitution
of the Commonwealth of Puerto Rico together with the Puerto Rican
Federal Relations Act, as approved by the Congress of the United
States. This status, agreed upon by compact and which may only be
modified with the consent of both parties provides the foundation
essential for sound economic growth.
Within this framework, the 2,200,000 people of Puerto Rico con-
tinue to share with other American citizens a common form of execu-
tive and legislative government, a common federal judiciary, a com-
mon technology, a common labor pool, a common field of investment,
and a common access to the innumerable services and functions of the
Federal Government.
The Commonwealth of Puerto Rico is one of the fastest growing
segments of the United States economy. In recent years, practically
all economic elements in the island have been activated. What is
perhaps much more significant, however, is the fact that these ele-
ments have been kept functioning in orderly and purposeful fashion
toward central objectives. And it might well be added that the magni-
tude of the adjustments that have had to be made in this period is
the best evidence of the basic resilience of the Commonwealth's
economic structure.
All local indicators of economic activity are suggestive of the trend
underway in Puerto Rico. Here are some examples covering the 1940-
1953 period.2
(1) The gross product, reflecting as it does the market value of
the entire output of commodities and services produced in Puerto
Rico, went up by a little more than 300 per cent.
'Sources: a, Division of Statistics, Bureau of the Budget; b, Statistical
Year-Book, Economic Development Administration; c, Annual Report, Secre-
tary of Treasury; d, Planning Board; e, The Government Development Bank
for Puerto Rico.








AN OVERVIEW


(2) Net income per capital data shows that money payments to
individuals increased approximately 250 per cent.
(3) Net income from agriculture rose over 125 per cent.
(4) Net income from manufactures registered a 364 per cent in-
crease.
(5) Private savings multiplied by nearly 300 per cent.
(6) Value of shipments to and from the continental United States
also increased by close to 300 per cent.
(7) The general revenue fund of the Commonwealth went up by
slightly more than 620 per cent.
(8) Income tax collections jumped by nearly 1500 per cent.
(9) Electricity generated increased by 378 per cent.
(10) Assessed value of property increased by about 155 per cent.
One additional interesting set of data reflecting the tempo and
the magnitude of the growth that has taken place in recent years is
the rate of increase in the number of plants of new industries starting
operations in Puerto Rico.


TABLE 1. PLANTS OF NEW INDUSTRIES STARTING IN
PUmETO Rico SINCE 1942
Fiscal Years Number Per Year Cummlative Total

1942-1947 10 10
1947-1948 9 19
1948-1949 26 45
1949-1950 35 80
1950-1951 32 112
1951-1952 60 172
1952-1953 81 253
July and August 1953 18 271
(Source: Puerto Rico Industrial Development Company.)


This progress has not been accidental. The island's present govern-
ment has for some time given, and continues to give, conscientious
attention to the problem of establishing and maintaining a suitable
"industrial climate." The present expectation of the industrialization
program is that at least 100 new manufacturing plants will begin
operations annually, and that by 1960 over 800 plants will be firmly
established. It is estimated that these 800 plants will create at least







6 BANKING GROWTH IN PUERTO RICO

80,000 new jobs, not to mention the countless induced service enter-
prises that will come into existence as a result of this industrial
expansion.
The list of growth indexes touched upon above can be expanded
by a number of equally meaningful items, not the least of which being
those reflecting the substantial growth in the Commonwealth's bank-
ing and credit sector over the past dozen years. This facet of the pic-
ture is the one upon which this text is focused, with details presented
in the pages that follow.









CHAPTER II


INSTITUTIONAL STRENGTHENING


KEEPING APACE OF ECONOMIC DEVELOPMENT
The quickening pace of the Commonwealth Government's eco-
nomic expansion efforts has had the effect of pointing up, among other
things, the need for keeping the island's financial services and facilities
abreast of the requirements of a fast-growing economy. Recognizing
this need as basic, the Commonwealth's Secretary of the Treasury,
since assuming his position in 1949, has been giving a high priority
to unburdening the Puerto Rican economy of outmoded, inadequate
and uneconomical institutional arrangements. The Treasurer gets
directly involved in this area of activity by virtue of his statutory
obligation as supervisor of commercial banks and certain other insti-
tutions subject to Commonwealth Government jurisdiction. His
responsibilities in this respect are not interpreted by him in the
narrow, preventive or corrective sense, but rather in the context of
fostering growth and general improvement of the banking industry
as an integral factor in advancing the Government's broad and far-
reaching program of economic betterment for the island's population.
Some of the significant accomplishments effected within the past four
years are discussed below.

STRENGTHENING OF BANKING CODE
The basic banking statute in Puerto Rico was enacted in 1923.
Since then a number of revisions and amendments have been made,
culminating with the passage and signing in 1950 of Act No. 430.
The changes introduced with this latest law were fundamental in
character. They were the result of the Commonwealth Treasurer's
efforts to clarify, enlarge and strengthen provisions of the basic law,
Act No. 55, as amended, in order to meet the requirements of the
expanding economy of Puerto Rico. In this work he was fortunate to
have had the fullest cooperation of both local bankers and officials
of the Federal Deposit Insurance Corporation.
This modernization of the banking code enabled locally chartered
commercial banks, among other things, to affiliate themselves with
7







BANKING GROWTH IN PUERTO RICO


the Federal Deposit Insurance Corporation, or the "F.D.I.C." as it
is familiarly referred to. The amendments, as reported by the Treas-
urer of Puerto Rico, sought to:
(1) define precisely the formerly vague provisions regarding the
limits and extent of the loaning powers of banks;
(2) provide for the supervision of investments;
(3) eliminate the former authorization which allowed banks to
issue mortgage bonds;
(4) raise the capital requirements for the establishment of new
banks, and require that the total be paid in cash;
(5) authorize the Treasurer to analyze and classify assets according
to soundness and to order the charging off of possible losses or the
creation of necessary reserves;
(6) provide for the transfer of private deposits inactive for over
15 years to the Government, as is the current practice in the States;
(7) prevent the impairment of the capital structure of banks
through the declaration of dividends;
(8) prevent speculative practices by banks; and
(9) regulate the manner in which banks can act as trustees.4
These improvements in the Commonwealth's Banking Code un-
questionably go a long way in assuring the continued performance of
commercial banking functions in Puerto Rico on the highest level.
They do not, however, cover all essential situations. An early need
exists, as explained in the previous chapter, for additional legislation
which will permit and encourage the establishment of financial in-
stitutions and facilities not now existent in Puerto Rico that are
definitely regarded as indispensable to the fullest fruition of the
Government's economic expansion efforts.
Then, too, there is need for explicit statutory provisions covering
several aspects of banking operations now governed by administrative
regulations prescribed by the Commonwealth's Secretary of the
Treasury. For example, Section 14 of the Banking Code places a
limit of 50 per cent of a bank's paid-in capital stock that can be in-
vested in real estate for use by the bank, including residences for
employees. This section contains no specific mention of parking lots
owned by banks. This has made it necessary for the Secretary of the
Treasury to interpret the provision to include parking lots. Another
See Foreword, Banking Law of Puerto Rico, Act No. 55, as amended by
Act No. 430, approved by Governor on May 15, 1950.






INSTITUTIONAL STRENGTHENING


case at point is the prohibition placed upon locally chartered banks
to purchase stocks for their own account. Here again we have an
example of no express prohibition in the law to a bank's buying stocks
for its own account. This omission has been construed by the Secre-
tary of the Treasury as a prohibition.
INSURANCE OF BANK DEPOSITS
While federal deposit insurance had been put into effect on the
mainland in 1933, as a direct consequence of the banking crisis, its
extension to Puerto Rican institutions did not come until March 1950,
when seven of the eight locally chartered commercial banks were
admitted to coverage by the Federal Deposit Insurance Corporation.
The eighth institution applied for membership later and was admitted
in January 1953. Six months earlier, that is, in July 1952, the branches
of the two national banks in the island had been required by special
act of Congress to insure their deposits in Puerto Rico with the
F.D.I.C. The Canadian banks in Puerto Rico, as foreign corporations,
are not eligible under the law to membership in this agency of the
Federal Government. These developments mean that all of the island's
commercial banks, excepting the Canadian institutions, are now
members of the Federal Deposit Insurance Corporation, an organiza-
tion in which 13,432 of the nation's 14,964 commercial banks held
membership on December 13, 1953.
The Federal Deposit Insurance Corporation protects insured
depositors against loss due to bank failure. The protection is cur-
rently limited to $10,000 per depositor in each insured bank. This
amount covers fully the greatest percentage of individual depositors,
since most of the individual accounts are for $10,000 or less. A sub-
stantial portion of the deposits in insured institutions, however, are
not so protected. The reason is simply that a relatively few depositors
maintain accounts in excess of $10,000. At the end of 1952, for ex-
ample, only 54.3 per cent of total deposits in all insured banks of the
United States was protected under the $10,000 limitation. The picture
in this respect for individual Commonwealth chartered insured banks
is presented in Table 2.
Federal deposit insurance protection, it should be added, not only
prevents or reduces losses to individual depositors, but it also
strengthens confidence in the safety of the island's banking system,
thus contributing to a healthy and sound economy.





BANKING GROWTH IN PUERTO RICO


TABLE 2. INSURED DEPOSITS OF COMMONWEALTH CHARTERED
COMMERCIAL BANKS, AS OF DATE OF EXAMINATION IN 1952
($000)
Bank Insured Total Percentage
Deposits Deposits Insured

Banco Popular ................. ............... $29,927 $60,900 49.1
Credito y Ahorro Ponceno..................... 35,816 54,916 65.2
Banco de Ponce. ........................... 16,253 38,479 42.2
Roig Commercial Bank ...................... 1,805 3,045 59.3
Credit Union Bank ......................... 1,172 2,801 41.8
Banco de San German ...................... 1,318 1,691 77.9
Banco de Economias y Prestamos .............. 1,060 1,412 75.1
Banco de San Juan (Progreso Financiero)....... 535 987 54.2
(Source: Commonwealth of Puerto Rico, Department of the Treasury,
Bureau of Bank Examinations.)

IMPROVED SUPERVISION AND EXAMINATION
In this area of activity real progress has been registered. Under
the direction of the Commonwealth's Supervisor of Banks, the dis-
parity which had existed between procedures and techniques pursued
in Puerto Rico prior to 1950 and those of the Federal Deposit Insur-
ance Corporation has been completely eliminated with the affiliation
of the locally chartered banks with the F.D.I.C. Prior to this affilia-
tion a number of basic differences existed in this field of activity.
Some of the more important of these are detailed in the author's
earlier volume on "Money and Banking in Puerto Rico."
Today, every commercial bank in Puerto Rico, excepting the local
branches of the two Canadian banks is a member of the Federal
Deposit Insurance Corporation. The branches of the national banks,
however, although they are now F.D.I.C. insured institutions, are
not supervised or examined by Commonwealth-F.D.I.C. officials,
but rather by the Comptroller of the Currency. The federal statutes
provide that all national banks may be examined by the Board of
Governors of the Federal Reserve System, but as a matter of practice
this is rarely done. This official, as a matter of practice, makes copies
of each examination available to the F.D.I.C. and to the Federal
Reserve Bank under whose jurisdiction the national banks come as
members of the Federal Reserve System. It should be pointed out
that permission to establish national bank branches beyond the con-
tinental limits of the United States must be obtained from the Board





INSTITUTIONAL STRENGTHENING


of Governors of the Federal Reserve System, which has been given
jurisdiction in this matter by the Congress of the United States.
(See Section 25 of the Federal Reserve Act.) As for the Canadian
institutions, their branches in Puerto Rico are examined individually
by the Commonwealth Government examiners.
In the examination of Commonwealth chartered insured banks,
the forms, techniques and procedures are precisely the same as those
used by the Federal Deposit Insurance Corporation throughout the
48 states. Local banks are not given any special treatment. The task
in Puerto Rico, as on the mainland, is to determine the true financial
condition of each institution, its earning power, whether the banking
laws and regulations are being observed, whether the practices and
policies pursued by each institution are safe and sound, and so forth.
In this way the faithful discharge of a bank's functions is assured
in the best interests of the general public, the depositors, the stock-
holders, and also of the officers of the institution itself, who assume
serious legal and moral obligations in the conduct of their bank.
Involved in all of this, of course, is an inquiry into the experience
and capability of the management of each institution.
With respect to the examination and supervision of locally char-
tered insured banks, the procedure is for the local examiners to team
up on every assignment with examiners from the New York district
office of the F.D.I.C. The joint approach is also practiced in some
states on the mainland by the F.D.I.C. with insured state chartered
banks. The joint approach in Puerto Rico has been made more effec-
tive through the personnel improvement program instituted by the
Commonwealth's Treasurer, the island's Supervisor of Banks. In
cooperation with F.D.I.C. officials, he arranged for the sending of
local examiners to the mainland for intensive on-the-job training in
F.D.I.C. practices and requirements. Through rotation, all of the
local examiners now on the job have completed this course of training.
In addition, members of the local examining staff are also being sent
to both the American Institute of Banking Graduate School, con-
ducted during the summers at Rutgers University, and the Inter-
Agency Bank Examination School at the Federal Reserve System in
Washington, D. C., a program conducted by the three bank super-
visory agencies of the Federal Government.
The task of the examining team is to present impartially all rele-
vant facts of each institution (including its branches) being examined






BANKING GROWTH IN PUERTO RICO


in order that the bank's directorate, as well as the supervisory authori-
ties, be well-informed of the condition of that institution. The annual
inspection of banks in Puerto Rico involves too much volume to be
handled by the seven Commonwealth bank examiners. This difficulty
is at present overcome (a) by using additional trained personnel
from other divisions of the Puerto Rican Treasury Department, in-
cluding the Income Tax Bureau and the Accounting Service; and
(b) through the joint approach with the F.D.I.C. Under this latter
arrangement the F.D.I.C. sends a number of its own examiners to
Puerto Rico each year to conduct the annual examination of Common-
wealth chartered insured commercial banks in cooperation with the
local examiners. The latest inspection found approximately 60
F.D.I.C. examiners participating in the task, not to mention the
highly specialized group of analysts maintained by the F.D.I.C. in
Washington, whose work it is to study and evaluate the complex
data reported to them by the examiners in the field. A fine example
of the close relationship existing between the F.D.I.C. and the local
Bureau of Bank Examinations is evidenced by the presence in Puerto
Rico, at the request of the Commonwealth's Secretary of the Treas-
ury, of an F.D.I.C. liaison examiner. In the joint undertaking with
the F.D.I.C. the local examiners make a real contribution, since they
have the benefit of intimate knowledge of the island, its problems,
etc., as well as the benefits of special analyses made by them of the
various institutions during the off-season. Since the advent of the
F.D.I.C. in the island, the local Bureau of Bank Examinations has
endeavored to pattern, to the greatest extent possible, their examina-
tion of non-insured banks in Puerto Rico after that of the Federal
Deposit Insurance Corporation.
There are many important details covered in an examination, the
information being based upon the books and records of each bank
examined, upon statements made to the examiners by its directors,
officers, and employees, and upon information obtained from other
available sources believed to be reliable and presumed by the examiner
to be correct. All of this information when properly assessed and
analyzed provides the basis for supervising these institutions.
A report of examination is a formidable document covering detailed
information on every pertinent point of bank operation and manage-
ment. Upon the completion of an examination, an examiner's report
is prepared and a copy of it, that is the so-called "Open Section," is
made available to the bank that has been examined with the request






INSTITUTIONAL STRENGTHENING


that each director, in keeping with his responsibilities both to de-
positors and stockholders, review it thoroughly. To assure that this
particular obligation is carried out, the Commonwealth's Secretary
of the Treasury, in his capacity as Supervisor of Banks, requires each
director to sign a letter in which it is stated that he has examined the
report of examination and that he is fully aware of its contents.
Broadly speaking, the details of an examination as now conducted
in Puerto Rico point up many important matters, including full
details on:
(a) Capital structure. (g) Valuation reserves.
(b) Deposit trends. (h) Fixed assets.
(c) The loan portfolio. (i) Non-conformance with banking
(d) Concentrations of credit, laws and regulations.
(e) The security portfolio. (j) Participation of directors.
(f) Policies with respect to charge- (k) Management and employee in-
offs. debtedness to bank.
(1) Earnings and dividends.
ESTABLISHMENT OF CASH DEPOT
For many years the currency and coin requirements of Puerto
Rico were met under an outmoded and costly procedure. The first
step to remedy this situation was not taken until March 1952, when
the United States Treasury, at the request of and in cooperation with
the Treasurer of Puerto Rico, established a Cash Custody Account
in the San Juan branch of the National City Bank of New York.
Under this new arrangement the United States Treasury has assumed
the responsibility of maintaining adequate supplies of currency and
coin in this "depot" in Puerto Rico. The set-up, which has no parallel
on the mainland, where a Federal Reserve Bank is "just around the
corner," was established with the understanding that it would be
adjusted in the light of experience.
Prior to the establishment of this new cash depot, local banks found
it necessary to carry substantial reserves of cash at all times, simply
because it was most difficult for them to estimate with any degree of
safety their precise requirements in advance. Two months was the
approximate period they were required to wait for the filling of their
request for coin and currency. Under such an unsatisfactory proce-
dure it was understandable why local institutions tended to request
amounts of cash in excess of current requirements in order to care
for unforseen contingencies.
Under the arrangement introduced in March 1952, currency and







BANKING GROWTH IN PUERTO RICO


coin are to be made available immediately in San Juan and in the
denominations required. Provision also exists for the exchange of
soiled and mutilated currency.6 With respect to the disposal of surplus
cash, the procedure established permits a local bank, upon its request,
to transfer excess amounts by cable and free of charge to a designated
New York city correspondent.
In the implementation of the new arrangement the San Juan office
of the National City Bank, under instruction of the United States
Treasury, issued to each of the other banks in the island a statement
governing the "Operating Procedure" of the depot. This statement
provides that:
1. The Treasurer of the United States will forward to the National
City Bank of New York, San Juan, P. R., such amounts of United
States currency in such denominations as may be needed to serve
the currency requirements of Puerto Rico.
2. Payments from the account will be made immediately upon receipt
of collected funds by means of currency, in good condition, in
denominations requested.
3. Deposits of excess currency in hands of banks in Puerto Rico will
be accepted on request. Such currency normally will be sorted,
eliminating the soiled and mutilated. Currency should be presented
in the following classifications:
(a) U. S. Notes.
(b) Silver Certificates.
(c) Federal Reserve Notes.
(d) Federal Reserve Bank Notes.
(e) National Bank Notes.
SMonthly data on "Exports of Mutilated Currency" from the National
City Bank in San Juan to the Federal Reserve from July 1952 through June
1954 follow:
1952 February $2,381,526 December $3,361,750
July $1,708,000 March 2,274,600
August 1,432,000 April 2,415,450 1954
September 1,735,000 May 2,982,350 January 5,224,100
October 2,808,500 June 2,895,350 February 4,343,950
November 1,475,500 July 5,998,300 March 1,870,550
December 2,367,950 August 3,843,700 April 2,553,950
September 3,603,750 May 3,869,900
1963 October 3,282,000 June 3,348,450
January 2,920,000 November 3,201,000
(Source: U. S. Treasury Department, Washington, D. C.)







INSTITUTIONAL STRENGTHENING


4. Credit will be given as requested in:
(a) Credit in account with the National City Bank.
(b) Manager's check.
(c) New York Draft.
(d) Cable transfer to the New York bank of choice.
5. Straps of all currency will carry the stamp of the depositing bank.
6. Soiled and mutilated currency will be handled as heretofore, that
is, exchanged for new currency or credit.
7. Both deposits and payments should be held to a minimum in the
interests of the work involved.
Over two years have now elapsed since the inauguration of the cash
depot in Puerto Rico, enough time to warrant some assessment of its
operation. It is generally conceded among the bankers in the island
that the present arrangement represents a tremendous improvement
over the earlier one. "If it were not for the Cash Custody Account,"
as one banker expressed it, "our institution would have to keep on
hand at the moment anywhere from $1 million to $1.5 million more
in cash." Other bankers all comment in similar vein, pointing out the
fact that a substantial part of otherwise idle funds can now safely
be employed by them. The provision for transferring surplus funds
cable free to New York correspondents has, incidentally, proved to be
an important dollar saver for the island's banks. It has also measur-
ably facilitated the operation of the recently established Clearing
Association in Puerto Rico.
Some complications, however, still exist in the present operation
of the cash depot. For example, difficulty is experienced regularly in
getting small coins, especially nickels and pennies. This understand-
ably has irked some of the local bankers, as it has their counterparts
on the mainland where the servicing of banks with these coins has
also been a problem during the past few years. In this respect every
attempt is made locally to keep all coin moving and available to meet
the demands of various banks.
In connection with the servicing arrangements for coin and cur-
rency, the National City Bank in San Juan states that:

The Custody Account delivers new and receives clean classified currency
daily according to the needs of all island banks. Periodically, requisitions
on the U. S. Treasury for replenishing the balance of the Custody Account are
made by us in order to place an adequate supply of coin and currency at the
disposal of all island banks. (See Table 3.) We ask that banks anticipating
unusually large needs in any period give notice of this fact at their earliest







BANKING GROWTH IN PUERTO RICO


TABLE 3A. SHIPMENTS BY U. S. TREASURY TO CASH CUSTODY
ACCOUNT DURING FISCAL YEAR ENDED JUNE 30, 1954
(0ooo)

C currency ................................................ $43,012
Coin................................. ......... .. 643

Total ....................... ......................... 43,655

TABLE 3B. CURRENCY IN CASH CUSTODY ACCOUNT,
JULY 1952-JuNE 1954

(8000)
(End of Month)
1952 February $13,151 December $10,008
July $8,118 March 10,311
August 5,924 April 11,761 1954
September 8,122 May 7,269 January 10,005
October 10,177 June 6,207 February 13,567
November 8,765 July 6,948 March 8,395
December 8,277 August 7,910 April 14,537
September 10,062 May 10,711
1985 October 7,234 June 9,593
January 14,948 November 8,518

(Source: U. S. Treasury Department, Washington, D. C.)

convenience in order that we can take these requirements into account in
future replenishment requests.
One looking at the data on the Cash Custody Account may well
get the impression that not the fullest use is being made of this fa-
cility, with the result that the gains under the arrangement to the
economy of Puerto Rico are not so great as they might be. A check
on this observation brought out several interesting facts. Officials of
two banks, for example, made the point that they maintain a num-
ber of branches in addition to their head offices; that at all of these
banking points there are a number of tellers in the commercial, sav-
ings, personal loan, and exchange departments with whom it is neces-
sary to keep adequate amounts of coin and currency. It was further
brought out by them that it is also necessary that they maintain
sufficient reserves at their principal offices for urgent uses. Moreover,
it was pointed out that some of the branches, in both instances, were
located at considerable distances from San Juan with the result that







INSTITUTIONAL STRENGTHENING


more cash is tied up at such points than at branches located com-
paratively nearby.
Speaking of branches, one of the bankers added the comment that
the extensive branch coverage of the island by his institution pre-
cludes operating with exact minimum cash requirements. Branches
also service each other as the need arises. Experience has shown, it
was further explained, that it is indeed not only convenient but also
prudent to have reasonable amounts of funds in reserve available at
all times. These "reasonable" amounts unfortunately sometimes
reach very substantial balances. Of course, from time to time these
balances are adjusted through the Cash Custody Account.
The strict classification of bills, by type and denomination, and
the sorting requirements of the United States Treasury also are
factors to be considered in this connection. This requirement takes
considerable time with the result that by the time a delivery of an
excess is made to the Custody Account a new excess has already taken
place. Those familiar with the problem have come to understand that
it is not always practical to deplete the excess continuously. The
substantial man-hours apportioned to the sorting and classification
of bills are more fully utilized when worth-while amounts are in-
volved. In other words, it may be preferable to work on a large excess
rather than on a series of small amounts. Perhaps it is relevant to
mention here that those institutions having an office in San Juan,
and most of the local banks do, use that office as the focal point
within their organization in arranging for the disposal of surplus
funds as well as for obtaining needed supplies of cash. This is due to
its more convenient location and the availability of a larger staff.
The seasonal factor also enters into the picture. For example, the
seasonal characteristics of cane cutting and milling have proved over
the years that weekly payroll requirements are very demanding from
late January to June. To be on the safe side banks have found it
advisable to carry substantial amounts of excess cash during those
months. Getting by June ushers in a consideration of hurricane possi-
bilities, which most of the local bankers feel also justifies the holding
of excess cash.
From the foregoing it is clear that the present Cash Custody Ac-
count arrangement for servicing the island with coin and currency,
with all of its advantages over earlier procedures, is still inadequate







BANKING GROWTH IN PUERTO RICO


and does not furnish the Commonwealth of Puerto Rico with the best
possible service in this important matter. Perhaps the best lesson
which experience to date with the present arrangement has brought
out is that a flexible currency and coin supply is possible only if a
Federal Reserve facility, as on the mainland, were "just around the
corner." This would mean an agency or a branch of the Federal Re-
serve in Puerto Rico. Special currency sorts as now required would
then no longer be necessary, assuming of course that the Federal
Reserve imposed the same rules it follows on the mainland where it
does not require sorting of "fit" from "mutilated" currency; nor
would the present requirement of sorting one type of currency from
another be necessary. Delays in servicing, such as are now experienced
from time to time, would also be eliminated, as would a good part of
the seasonal piling up of idle funds in the vaults of the local banks.
One further detail in this matter that merits consideration, for it
would seem to reflect the feelings of an important segment of the
banking community, is the maintenance of the Custody Account in
the San Juan branch of the National City Bank, a privately owned
banking institution which operates in general competition with other
banks in the island. The handling of the Custody Account by the
National City, incidentally, does not represent a gratuitous service
of that institution. The United States Treasury always arranges to
compensate for such services performed for it by maintaining at all
times a sufficient deposit of federal funds which, because the law
requires their being secured by 100 per cent acceptable collateral (i.e.,
United States Government securities), earn enough to cover all ex-
penses occasioned by the handling of the Cash Custody Account. On
the other hand, the National City Bank is under constant pressure
by the United States Treasury to keep the cost of operating the ac-
count at a minimum. In addition to providing the National City
with a source of income, holding of the account also gives it a prestige
advantage not enjoyed by any of the other banks of the island.
OVERHAULING OF CLEARING MECHANISM
Early in his term the present Secretary of the Treasury of the
Commonwealth recognized the need for keeping the mechanics of
banking in step with the requirements of an expanding economy.
One of the projects initiated by him at that time was aimed at remedy-
ing outmoded and inadequate check collection and settlement prac-






INSTITUTIONAL STRENGTHENING


tices. Formerly, it was general practice to effect all clearings and
settlements between banks in the same city on a bilateral basis, with
all sending to other towns on a remittance basis with payment in
San Juan funds. Details in this respect are presented in the author's
"Money and Banking in Puerto Rico" text.
A break-away from outmoded practices actually got under-way
in November 1952, following visits to the island, on the invitation
of the Governor, of technicians from the Federal Reserve System.
The outcome of this cooperative effort was an "Agreement Relating
to Collection of Checks," entered into by local banks. Unlike the
earlier arrangements, the currently developing procedures are being
developed insofar as possible to fit the particular requirements of
the Commonwealth's economy, utilizing whenever practicable and
desirable, the experiences and techniques developed on the mainland
over generations.
The lack of a central clearing agency in Puerto Rico, such as the
Federal Reserve Banks provide on the mainland, has made it advis-
able for the island banks to improvise a system of check collection
and settlements which affords some consistency and practicability
until such time as a permanent clearing mechanism can be estab-
lished. The procedures being employed at the present time, and the
improvements contemplated, are so devised that when a central
mechanism is established for all of Puerto Rico and its integration
effected with that of the Federal Reserve, the transition would be
easily accomplished. In the meantime the local bankers continue to
improve and extend existing techniques and procedures as provided
in the "Agreement Relating to Collection of Checks."
The Agreement sets forth procedures and also objectives which
the local bankers are striving to attain in the early future. In this
respect real progress has been made although much more remains
to be done. For example, experience shows that even at present banks
often have to wait as long as from three to five days to be put "in
good funds" for payments made or credit given on many checks drawn
on island banks. This condition persists simply because of the lack
of an effective overall clearing and settlement mechanism and also
because of poor communication facilities. A by-product of this,
understandably, is "float," that is, uncollected balances, the existing
volume of which is clearly too large for an area of the size of Puerto
Rico. The dangers inherent in float are known to all bankers.







BANKING GROWTH IN PUERTO RICO


The 1952 Agreement mentioned above provides, among other
things, for a Clearing Association composed of one representative of
each participating bank, other than the Settling Agent, that is a
party to this Agreement.6 Provision is also made for the following
types of check collection:
(a) The collection of checks within the metropolitan area;
(b) The collection of checks between points in the metropolitan
area;
(c) The collection of checks within each other city having a bank-
ing office of more than one participating bank;
(d) The collection of checks between the metropolitan area and
Arecibo, Bayamon, Caguas, Mayaguez and Ponce; and
(e) The collection of checks between other cities of Puerto Rico.
It was agreed that each of the above steps would be taken as soon
as practicable in the order indicated. To date, only (a), (b) and (c)
above have been made effective. Implementation of the remaining
sections is now under study.
Another provision of the Agreement designates the Government
Development Bank for Puerto Rico as Settling Agent. For this pur-
pose this institution agreed to accept deposits from each of the
Association's members with the understanding that such deposits
were to be used exclusively by such banks for the settlement of their
daily exchanges. This is a completely new venture for the Develop-
ment Bank which, incidentally, is handling the operation very
effectively.
To facilitate settlements arising out of clearances, the Development
Bank was permitted to establish a non-member clearing account in
its own name with the Federal Reserve Bank of New York. It is
understood among the clearing banks that this account is to be used
for the purpose of settling balances arising out of the check exchanges
effected under the Agreement. It is also agreed that funds in this
account are not to be commingled with other funds of the Govern-
6 The Agreement was signed by eight banks, namely, Banco Popular, Credito
y Ahorro Ponceno, Banco de Ponce, Credit Union Bank, The National City
Bank, the Chase National Bank of New York, the Royal Bank of Canada, and
the Bank of Nova Scotia.
In the San Juan-Santurce areas, only the Bank of San Juan at this writing
is not a direct participant. At present it is clearing through Banco Popular.
The Credit Union Bank has been merged with Banco Popular since the
writing of this section.






INSTITUTIONAL STRENGTHENING


ment Development Bank. In short, the account represents amounts
due members of the local clearing-house group. Incidentally, balances
so held by banks subject to Commonwealth jurisdiction may be
included by them as part of their legal reserves.
A brief description of the present operating procedure of the
clearing and settling operation as now carried on will help to show how
well a simple mechanism such as this one serves the economy of
Puerto Rico.
Each day, the participating banks in the metropolitan San Juan
area sort and list checks received by them and drawn on the other
participating banks in that area. These are then delivered to each
other, together with a copy of the tape listing, against receipt. De-
livery is made at a mutually convenient time with the stipulation,
however, that it be done early enough to permit each bank to deliver
by hand a copy of its settlement sheet to the Settling Agent by not
later than 10:30 A.M. The actual settlement sheet of one of the
banks (for June 15, 1953) is shown in Table 4.
Posted on a settlement sheet by each institution, in this example
by Banco de Ponce, is the total of checks received from and sent to
each participant. With respect to the San Juan-Santurce clearing,
the practice is for the Santurce members to compute their net posi-
tion and advise their San Juan office as soon as possible. The San
Juan office prepares a form, as in Table 4, but includes therein, in
addition to its own net position, the net settlement of its Santurce
offices and the total net settlement of the day.
Table 4 also shows for June 15, 1953, the amounts of checks de-
posited in Banco de Ponce and drawn on and sent to the other mem-
ber banks; they represent a credit to be received by this institution.
The form further indicates the amount of checks drawn on Banco
de Ponce deposited with the other banks and forwarded by them to
Banco de Ponce, and the claim thereon presented to that institution
through the clearing mechanism.
In possession of all settling sheets by 10:30 A.M., the Development
Bank as Settling Agent prepares a "Reconcilement Statement" in
order to prove the correctness of the clearing. See Table 5 for June
15, 1953 statement.
With its settlement sheet, each bank includes instructions as to
how the net gain or loss from the day's settlement is to be handled.
In this connection it should be noted that provision has been made







BANKING GROWTH IN PUERTO RICO


TABLE 4. SETTLEMENT SHEET OF A CLEARING BANK
To: Government Development Bank for Puerto Rico June 15, 1963
Date
From: Banco de Ponce
We have presented to and received from the banks listed below (in accord-
ance with the terms of the above-mentioned agreement), checks and other
items in the amounts indicated.
Amount Received Amount Sent


Banco de Ponce .................
Banco Popular...................
Bank of Nova Scotia............
Chase National Bank............
Credit Union Bank..............
Credito y Ahorro Ponceno........
National City Bank of N. Y......
Royal Bank of Canada...........

Totals .......................

1) Net Amount.................

Net Settlement
2) Santurce Office ..............

Total Net
3) Settlement....................

Credit


$116,922.03
30,607.16
15,055.95
1,775.30
68,377.96
135,441.10
41,102.55

409,282.05

Dr.


Dr. 38,417.79


Dr.


$175,833.46
17,153.28
37,886.08
4,369.61
89,688.77
317,890.68
36,926.14

679,748.02

Cr. 270,465.97


Cr.


Cr. 232,048.18


4) Please debit our account with the net amount indicated on line 3 above.
5) We have today arranged 0 cable transfer
credit to our account by 0 payment order of $
0 Gov. Dev. transfer
through Bank.

6) Please debit our account and transfer $ to --

7) After giving effect to the above transactions our balance with you
is --

Bank
(Authorized Signature)
(Source: Government Development Bank for Puerto Rico.)







INSTrrUTIONAL STRENGTHENING


TABLE 5. RECONCILEMENT STATEMENT OF BANK CLEARINGS,
JUNE 15, 1953
Banks Debit Credit

Banco de Ponce ............................... $232,048.18
Banco Popular............................... 312,838.26
Bank of Nova Scotia ........................... 376.87
Chase National Bank .......................... 76,543.66
Credit Union Bank........................... $ 18,441.20
Credito y Ahorro Ponceno ...................... 138,694.91
The National City Bank of N. Y............... 751,523.23
Royal Bank of Canada ......................... 9,462.55

Totals.................................. $769,964.43 $769,964.43
(Source: Government Development Bank for Puerto Rico.)

at the bottom of the form (Table 4), for the authorization to debit or
credit the respective bank's accounts with the net amount of the
settlement. The form also contains provision for notice to the Settling
Agent as to how settlement is desired. In this respect, several alterna-
tives are open. These are:
1) A bank may instruct the Settling Agent simply to debit or credit,
as the case may be, its clearing account with the net amount of the
settlement; or
2) A bank may wish to effect settlement, when a net debit exists,
by informing the Settling Agent that it has arranged credit to its
account, (a) by cable transfer, in which case a mainland correspondent
bank is instructed by the local bank in coded cable to make a transfer
to its account of a specified sum of money to the Government De-
velopment Bank's non-member clearing account with the Federal
Reserve Bank of New York. The Development Bank informs the
Federal Reserve Bank by coded cable that it must receive such
amount with a special coded word; or (b) by payment order, that is,
an order on a correspondent, as above, only this order is transmitted
by air mail instead of by cable (this can be accomplished only when
a local bank can anticipate a debit balance in a future clearing); or
(c) by a transfer on the books of the Development Bank, that is, a
bank with a debit balance might arrange with a local bank that has
excess funds to transfer them to its account on the books of the
Government Development Bank.







BANKING GROWTH IN PUERTO RICO


When a bank finds that its balance with the Settling Agent is in
excess of requirements, it may instruct the latter, on its settlement
sheet for the particular day, to debit its account and transfer the
specified sum of money to a designated third party, usually a New
York correspondent with whom it wishes to build up its balance.
This notification is transmitted in code by the Development Bank
to the Federal Reserve Bank of New York.
A further detail supplied on a bank's settlement sheet, in addition
to a complete record of its clearings for the day, and its net position,
is the balance with the Settling Agent after the foregoing debits and
credits have been made. The Development Bank, after balancing the
sheets submitted to it by each of the participating banks, and after
having received confirmation from the Federal Reserve of New York
that all requested debits and credits to its clearing account have
been consummated, confirms the closing balances to the participating
banks on the duplicate copy of the settlement sheet. These figures,
together with the similar totals supplied in the same way by the other
banks must, after the day's settlement, always be equal to the net
balance in the Government Development Bank's clearing account
with the Federal Reserve Bank of New York.
It will be noted that the foregoing description of operating proce-
dure does not cover clearing operations in cities outside metropolitan
San Juan having an office of more than one participating bank.
(See (c), page 20.) This is because the explanation was prepared
before section (c) above was implemented. Participating banks in
these multiple-office cities now conduct their own intra-city clearing
operation, clearing daily among themselves and calculating their own
individual net balances. Each institution, under the procedure fol-
lowed, reports daily by telephone its net debit or credit position to
its San Juan office immediately after it is determined. The latter, in
turn, enters the amount on its own settlement sheet which includes
the metropolitan San Juan operations. The settlement sheet so
executed is then sent on to the Government Development Bank
which processes the data as Settling Agent. The only difference
between the settlement sheet as shown in Table 5 and the settlement
sheet now in use is that the former has been amended to include the
net settlements for clearing points other than San Juan and Santurce.
A few additional matters merit mention. As contemplated in the
Agreement, "return items" are to be returned to the presenting bank







INSTITUTIONAL STRENGTHENING


not later than 2:30 P.M. on the date of presentation in the case of
banking offices operating within an intra-city clearing system, except-
ing in the case of items aggregating $10,000 or more, in which in-
stance the returning bank may request in writing that the Settling
Agent make appropriate adjustment in the computation of the debits
and credits of the bank to which, and the bank by which, such items
are to be returned. If such request is received by the Settling Agent
before 3:00 P.M., or such other time as may be established by the
members of the Clearing Association, the Settling Agent may notify
the sending bank and make the adjustment in the Settlement for the
day. That part of the provision requiring items to be returned by
not later than 2:30 P.M. on the date of presentation has been put
into force among members of the San Juan clearing.
The present arrangement with respect to return items is to return
them to the presenting bank with the request to be paid by manager's
check in exchange for the amount of items. (Incidentally, this tends
to inflate the clearing figures.) When a return item chances to be a
sizeable one, the receiving bank is to give notice to the sending bank,
by telephone or otherwise, of any large item it expects to return.
With respect to errors and adjustments, the practice generally
followed is first to confirm them by telephone, then enter them on
special claim tickets which are included with the checks presented
in the next day's clearings.
On the basis of experience to date, it would seem that the present
practice of the Government Development Bank, in deferring avail-
ability of credits resulting from one day's exchange until the follow-
ing business day, should be amended to permit banks to receive
immediate credit. This would be in line with the basic purpose of a
clearing and settlement mechanism, for banks in making payments
on checks for the convenience of customers, are definitely entitled to
be put in "good funds" for the checks cashed by them at the earliest
possible moment. If this is accomplished, a fundamental objective
of the arrangement is achieved. It is clear that a bank should supply
the necessary funds to the Federal Reserve Bank of New York, via
its correspondent, to permit necessary transfers and cable notification
by the Federal Reserve of New York to the Government Development
Bank by 2:00 P.M., New York time. Local bankers recognize this
problem, but they point out some practical difficulties in implementing
this practice. For example, they say that the Settling Agent is at







BANKING GROWTH IN PUERTO RICO


present unable to make the transfer on the same day because of the
time factor. Settlement sheets are received too late in the Develop-
ment Bank's office (between 10:00 and 11:00 A.M.), while it would
be necessary that these be received early enough to give ample time
to prepare the clearing figures and dispatch the cable to the Federal
Reserve not later than 10:00 A.M. In view of the inconveniences, it
seems that funds will not be available the same day unless clearing
closing time is moved to an earlier hour, for example, 8:00 A.M.
Up to this point attention has been focused upon the collection
of checks within and between points of the metropolitan San Juan
area and within other cities having a banking office of more than one
participating institution. Now a word on the status of the remaining
steps to be taken before all provisions of the 1952 Clearing Agreement
will have become operative. The next logical step is the implementa-
tion of section "d" of the Agreement (see page 20) which provides
for the collection of checks between banks in the metropolitan area
and banks in Arecibo, Bayamon, Caguas, Mayaguez, and Ponce.
This operation could be handled easily through direct sending with
net settlements effected in multi-office city clearings. This procedure
would in effect put the operation in the section (c) channel. This
appears to be the course of action that the island's bankers are about
to adopt. Some operating details would of course have to be con-
sidered, such as return items, but these should present no real prob-
lems once the main structure has been realized and effective inter-
bank cooperation has become a reality.
With all of the foregoing in operation, practically all of the island's
checks, both in number and in dollar amount, would be covered.
All that would remain would be a comparatively few items passing
between other points in the island. (Section (e), page 20.) Since the
amounts involved are very small, the existing procedure could be
continued without creating any serious problem, at least until a
central over-all clearing agency were established in Puerto Rico.
The above exposition clearly indicates that important progress is
being achieved by the bankers of Puerto Rico in providing the Com-
monwealth with improved check clearing and settlement procedures;
also that more remains to be accomplished. One fact that stands out
is that the best possible arrangement can come only with the estab-
lishment of a central clearing agency in which all banks and their
branches throughout the island participate and when the arrange-






INSTITUTIONAL STRENGTHENING


ment is fully and effectively coordinated with the clearing and
settlement mechanism of the Federal Reserve System.
CREATION OF FINANCE CONFERENCE
A recent development in the island has been the creation by the
Governor of Puerto Rico of a Finance Conference to advise him
directly on important matters in the field of banking and finance as
they relate to the furtherance of the Commonwealth's economic
development objectives. Membership of the Conference includes
several key officials of the government, namely, the Secretary of the
Treasury, the Director of the Planning Board, the Director of the
Budget, the President of the Government Development Bank, and
the President of the Economic Development Administration.
The attention of this group has thus far been focused principally
upon the problem of accelerating economic growth. In this context
they have been considering, for example, such subjects as the future
r61e of the Development Bank, how more effective use can be made
of the borrowing capacity of the island's municipalities, how to achieve
a fuller and more rational use of Puerto Rico's combined private
and public loanable funds, and where untapped sources of funds
may exist for economic development in Puerto Rico.








CHAPTER III


COMMERCIAL BANKING


STRUCTURAL ASPECTS OF COMMERCIAL BANKING
The Commonwealth's commercial banks have come along fast in
the past few years in meeting the basic banking requirements of a
rapidly expanding economy. This is reflected not only in the number
of new offices opened but also in the nature and volume of transac-
tions, tie-ins with mainland institutions and mechanisms, private
and public. Previous historical aspects of this development are dis-
cussed in the author's earlier volume on "Money and Banking in
Puerto Rico."
BANKING OFFICES
Commercial banking facilities are today directly available in 23
of the 76 municipalities of Puerto Rico. The communities serviced
by the island's banks are of course the more important ones, repre-
senting the centers of present population and industry. At the
present time the commercial banks in the island operate 72 offices,
including the two agencies of Banco de Ponce in New York City.
Not included, however, are the mainland agencies of the two Canadian
Banks, or the head offices and branches in New York City of the two
national banks. One armored truck, it should be added, is operated
by the National City Bank within the city limits of San Juan. This
vehicle itself is equipped with a sealed compartment in which de-
posits in sealed bags may be placed by customers of that institution
in bailment for delivery to, and acceptance by, the office in San Juan
of the National City. There, such deposits are removed from the
sealed compartment very much in the same manner as from a night
depository and the several sacks of deposits therein are opened by
either two tellers of the bank, or, they are held for opening by or in
the presence of representatives of the depositors. Credit to each de-
posit is given on the books of the bank after the contents of the de-
pository sacks have been verified and accepted by the National City
Bank. A full breakdown of the island's banking offices is presented in
Table 6.







COMMERCIAL BANKING


TABLE 6. LOCATION OF COMMERCIAL BANKING OFFICES AS OF SEPTEMBER 1954

COMMONWEALTH CHARTERED BANKS
Banco Popular de Puerto Rico
Head Office: San Juan (59-201)

Branches and Servicing Offices:


Santurce, Stop 17 (59-
284)
Santurce, Stop 22 (59-
284)
Puerta de Tierra (59-
201)
Martin Pena (59-284)
Barrio Obrero (59-284)
Rio Piedras, De Diego
St. (59-241)
Rio Piedras, Universi-
dad de Puerto Rico
(59-241)


Rio Piedras, Plaza del
Mercado (59-241)
Hato Rey (59-241)
Puerto Nuevo
Fort Buchananb (59-
284)
U. S. Naval Air Sta-
tion' (59-201)
Ramey Field (59-260)


Bayamon (59-257)
Ponce (59-221)
Manati (59-286)
Aguadilla (59-260)
Vega Baja (59-286)
Caguas (59-234)


Banco Credito y Ahorro Ponceno
Head Office: Ponce (59-218)
Branches and Servicing Offices:


San Juan (59-208)
Santurce, Stop 17 (59-
287)
Martin Pena (59-296)
Guayama (59-246)
Arecibo (59-253)


Rio Piedras (59-242)
Yauco (59-263)
Fajardo (59-290)
San Sebastian (59-291)


Loiza St. (59-292)
Puerto Nuevo (59-295)
Mayaguez (59-226)
Lares (59-218)
Mayaguez Playa'


Banco de Ponce
Head Office: Ponce (59-219)
Branches and Servicing Ofices:


San Juan (59-209)
Santurce (59-300)
Caguas (59-297)
Mayaguez (59-229)
Utuado (59-279)
Arroyo (59-288)


Guayama (59-247)
Aibonito (59-282)
New York City, 51
Broadway, (1-955/
260)
New York City, 153 E.
116th St.' (1-955/260)


Arecibo (59-251)
Cayey (59-298)
Cabo Rojo (59-283)
Central Aguirre (59-
219)







BANKING GROWTH IN PUERTO RICO


TABLE 6.-Continued
Banco de San Juan
Head Office: San Juan (59-205)
Branches and Servicing Offices:
Santurce, Stop 17 (59-205)
Roig Commercial Bank
Head Office: Humacao (59-266)


Branches and Servicing Offices:
Juncos (59-303)


Yabucoa/ (59-302)


Banco de Economias y Prestamos
Head Office: San German (59-272)

Banco de San German
Head Office: San German (59-273)
Credit Union Bank"


San Juan (59-202)


San Juan (59-203)


BRANCHES OF CANADIAN BANKS
The Royal Bank of Canada
Santurce (59-285) Mayaguez (59-227)
Bank of Nova Scotia
Santurce (59-301) Fajardo (59-269)


BRANCHES OF NATIONAL BANKS
The Chase National Bank of the City of New York


San Juan (59-206)


San Juan (59-204)
Arecibo (59-252)
Mayaguez (59-228)


Santurce (59-293)


Fhe National City Bank of New York
Bayamon (59-256) Santu


rce (59-294)


Caguas (59-235)
Ponce (59-220)


Provisional activity limited to mortgage servicing only. (FHA and Vet-
erans.)
bMobile Unit.
c Fixed Unit, operating part-time.
d Operates merely as a paying and receiving station. Has no transit number.
See discussion of these New York city agencies on page 33.
I Authorized by Commonwealth banking authorities, but not yet in oper-
ation.
9 Merged with Banco Popular de Puerto Rico; all offices closed.
(Source: Commonwealth of Puerto Rico, Department of the Treasury,
Bureau of Bank Examinations; also Rand McNally and Company.)






COMMERCIAL BANKING


Directing the operations of these institutions on December 31,
1953 were 310 officers. Under them 1,854 employees worked in the
various departments of these institutions.
Eight of the commercial banks are locally chartered; two are
branches of Canadian institutions, and the remaining two are branches
of national banks with head offices in New York City. Of the locally
chartered banks, only one of them maintains servicing agencies
(two of them) in New York City, although all of them are linked to
the mainland's financial mechanism through correspondent institu-
tions. A list of the principal mainland correspondents of Common-
wealth chartered banks is given in Appendix C.
All of the island's commercial banks are members of the American
Bankers Association. Some of the officers of these institutions are
affiliated with such organizations as the Robert Morris Associates, a
national organization of bank credit officers. Since all of the local
institutions are part of the American banking system, each has a
transit number assigned to it by the American Bankers Association
for purposes of identification, that is, of its name and location. The
numbers for all of the banks in Puerto Rico, as of September 1954,
are shown in Table 6. It will be noted that every commercial bank
in the island has a "59" as the first component of its transit number.
This immediately identifies the location of the institution as being
in either Puerto Rico, Hawaii, or Alaska. In addition to the number
59 the head office of each bank is assigned a special number of its
own. The same is true for each of the branches, unless it uses the
same transit number of its head office or of one of its principal
branches. The larger cities on the mainland, incidentally, are given a
transit numerical prefix of 1 to 49, with the states assigned numbers
beginning at 50. This explains the use of the prefix 1 for each of the
New York agencies of Banco de Ponce. Transit numbers were intro-
duced to speed up the collection of checks and cut expenses in the
handling of these items.
The commercial banks in Puerto Rico are of varying sizes. An
idea of the relative size of each may be gained from the data pre-
sented in Table 7.
San Juan, including suburban Santurce, is the Commonwealth's
principal banking area, with Ponce following in importance. Metro-
politan San Juan is Puerto Rico's financial and economic center
and connecting link with the States by air, cable and ship.











TABLE 7. RELATIVE SIZE OF COMMERCIAL BANKS OPERATING IN PUERTO RICO (AB OF JUNE 30-$000)


Bank


Banco Popular de Puerto Rico......
Banco Credito y Ahorro Ponceno...
Banco de Ponce ....................
Roig Commercial Bank............
Credit Union Bank .................
Banco de San German.............
Banco de Economias y Prestamos...
Banco de San Juan (Progreso Finan-
ciero)............................
National City Bank of New York...
Chase National Bank of New York..
Royal Bank of Canada.............
Bank of Nova Scotia .............


Total Net Assets


$ 22,177
14,025
9,979
1,551
365
1,033
477


199
62,014
8,571
7,719
7,626


1953 1942


$ 76,431
63,450
42,385
4,577
3,910
2,172
2,001

1,761
77,623
24,957
14,065
13,823


Total Deposits


1953

$ 68,602
55,899
37,464
3,877
3,231
1,799
1,609

1,485
72,160
18,360
12,754
5,434


$ 18,572
10,287
7,380
1,000
288
854
377


110
61,407
8,548
7,667
2,834


Total Loans


1942

$ 7,451
5,831
4,624
784
164
277
203


129
9,186
1,819
4,318
6,671


1953 1942


$ 36,385
35,618
17,621
1,462
1,778
746
816

839
44,728
19,757
9,740
11,925


Total Investments


1953

$26,785
15,388
16,275
1,323
1,324
459 0
545

556 Z
11,450 '
1,450 M

0


$ 7,723
2,833
2,255
270
101
98
52


2
1
7


Totals......................... $135,736 $327,155 $119,324 $282,674 $41,457 $181,415 $13,342 $75,555


As a matter of policy both Canadian banks in Puerto Rico utilize all available resources in local lending operations,
none of their funds being currently invested in securities or transferred to Canada for investment.
(Source: Commonwealth of Puerto Rico, Department of the Treasury, Bureau of Bank Examinations.)


o






COMMERCIAL BANKING


BRANCH OFFICE BANKING
The r6le played by commercial banks in the economic growth of
the Commonwealth is clearly reflected in the number of new banking
offices opened by them in recent years. Just as roads and power,
for example, are basic to a community's economic development, so
are financial facilities provided by commercial banking institutions.
From 38 offices in 1945, the number rose to 51 by 1950, and to 72 by
1954. Forty-nine of the banking offices are operated by the three
largest Commonwealth chartered banks. Understandably, in the
momentum of industrial expansion a competitive consciousness
exists for key locations. This is normal and, in fact, an indication of
sound development, especially since great care is exercised by the
supervisory authorities to assure that a need exists for new branches
and also that the requirements of law in this respect are observed.
It will be noted that one of the locally chartered banks, namely,
Banco de Ponce, operates two agencies in New York City. The one
at 51 Broadway was opened in 1946 and the other, at 153 East 116th
Street, in 1950. Since the latter is located in the Puerto Rican sector
of New York, its activities are almost exclusively confined to money
transfers to Puerto Rico and to cashing of checks for the local popula-
tion. The Broadway office, on the other hand, provides a wider bank-
ing service to its clientele. For example, it accepts demand deposits
from non-New York State residents. The New York banking au-
thorities do not permit it to accept such funds from New York State
residents unless they are specifically engaged in foreign trade. This
office also engages in a number of the customary banking transactions,
such as the making of demand loans, the issuing of letters of credit,
effecting fund transfers and, in particular, advancing substantial
sums to its New York customers against their drafts covering ship-
ments of merchandise to Puerto Rico. The New York State banking
authorities permit Banco de Ponce to engage in the aforementioned
transactions for anyone regardless of residence, providing it meets
the requirement that it maintain a satisfactory asset position in the
continental United States to cover any obligations an agency may
incur with mainland banks. Banco de Ponce, however, is not per-
mitted to pay interest on deposits held at their agencies. This of
course means that these offices cannot accept time or savings deposits
in New York.
These two agencies of Banco de Ponce are regulated by the Super-






BANKING GROWTH IN PUERTO RICO


intendent of Banks of New York State. They are also subject to
Commonwealth Government and Federal Deposit Insurance Cor-
poration supervision. Profits accruing from the operations of the
agencies in New York are subject to both Federal and New York
State income taxes.
With respect to the opening of new branches in the island, the
locally chartered banks must receive the approval of the Common-
wealth Government's Secretary of the Treasury, in his r6le as Super-
visor of Banks. Since all of these institutions are insured banks, ap-
proval must also be forthcoming from the Federal Deposit Insurance
Corporation. As for the branches of the national banks in Puerto
Rico, as already pointed out, they need only obtain the approval of
the Board of Governors of the Federal Reserve System since these
institutions as "foreign branches" of national banks operate by
virtue of the authority contained in Section 25 of the Federal Reserve
Act. As a matter of good relations and cooperation between the
Commonwealth Government and the Federal Reserve Board, there
is a trend toward consultations between the Commonwealth bank
supervisory authorities and the Federal Reserve in reference to
matters of mutual interest. With respect to the Canadian branches
in Puerto Rico, being subject to Commonwealth jurisdiction, they
must receive the approval of the Commonwealth's Secretary of the
Treasury before they can open new branches in the island.
Branch offices, operated as they are by larger institutions, furnish
a well-rounded banking service to businesses and the public in the
communities in which they are located. The presence of a bank en-
courages thrift and discourages hoarding. Furthermore, it tends to
reduce the abuses of the private lender and the merchant lender.
Funds deposited in the branches and not needed for local operations,
are transferred to the parent bank where they can be put to pro-
ductive work for the economy of Puerto Rico. These branches, no
matter how small, are of course as safe as their parent institutions.
They are individually examined by the supervisory authorities at
the same time as their parent institutions.
Supervisory authorities, in considering applications for new
branches, maintain an alertness to assure that in the race for new
locations a community is not being over-banked, that these institu-
tions are paying their own way with prospects that they will continue
to do so in the future. The authorities are fully aware of the dangers







COMMERCIAL BANKING


of an unprofitable institution and the negative impact it can carry
upon an expanding community. They are conscious of the need for
assuring that there is a sound economic justification for the new
offices and that the financial burden of the new offices will not repre-
sent a drain on incomes from already established banking offices;
that the opening of new branches is not the result of forced compe-
tition which can only lead to a division of a limited volume of business,
with the result that neither the new branch nor an already estab-
lished branch of a competitor will be able to gross enough to cover
their costs; also that a bank is not permitted by the chartering
authority to open up in a community now being adequately serviced
by an existing banking office, which may be located either in the
community in question or in its immediate environs, unless the
volume of business justifies the opening of the new branch. Looseness
in this regard, they realize, can well force an existing institution, in
this case, to seek another branch directly in the community involved
in order to protect its present accounts.
While the number of physical banking units in Puerto Rico con-
tinues on the increase, it must be stated that the operators of these
institutions are becoming increasingly conscious of the need for im-
proving the banking competence of their personnel. Some bank
officers in fact occasionally conduct special classes of their own as a
means of improving the efficiency of their employees. Some institu-
tions also award annual scholarships to selected personnel to go to
mainland universities to further their education and training.
MULTIPLE AREA SERVICE UNITS
As noted earlier, there are 53 Puerto Rican municipalities in which
banking facilities are not directly available at the present time.
Many of these bankless communities are beginning to find them-
selves in the main currents of growth and industrial expansion. In
fact, a number of the new industries currently being attracted to the
island are establishing themselves in or about these towns. This
growth is being carefully studied by the island's bankers who under-
standably are ever on the alert for new banking sites. Some of these
areas will perhaps soon be able to justify the establishment of full-
time banking facilities. A number of the others, however, will take
longer, although in the meantime the availability of such facilities
even on a limited basis, could not only be justified but in fact would








BANKING GROWTH IN PUERTO RICO


provide an important factor in accelerating the economic progress
of the region.
To meet the growing needs of some of the more important of these
bankless communities, vehicular banking service, operated from a
fixed banking point, has been proposed by one of the locally chartered
commercial banks, namely, Banco Popular. This institution, inci-
dentally, already has a mobile banking unit in operation servicing
the requirements of the United States military establishment at Fort
Buchanan. This unit or "facility," as it is technically referred to by
its sponsor the United States Treasury, has now been functioning
smoothly for over two years.7 During this period valuable experience
has been gained which convinces its operator that similar servicing
units might well be the answer to providing a large number of grow-
ing, but still bankless, communities with banking facilities on an
economically justifiable basis. The confidence of this institution in
the merits and the soundness of the idea is based upon intensive
study over a period of several years. Surveys of various regions have
been made and costs have been investigated. Banco Popular's first
experimental unit would be based at the Manati branch, servicing
several of the adjoining municipalities. If operation of this unit were
authorized and if it proved successful, Banco Popular states that it
would put a number of additional units on the road, providing, of
course, approval of the authorities were forthcoming.
One of the basic requirements of an industrial community is the
availability of adequate banking services. The Commonwealth
Government recognizes this. In fact, one of the specific objectives of
its development program is the fostering of the use of banks by as
many people as possible. This, it believes, would tend to give a for-
ward push to the industrial life of communities, promote thrift
among the island's inhabitants, and also encourage ways in which
the accumulated resources of the island could be channelled into pro-
ductive pursuits.
7 A banking "facility" is authorized to be established on government reser-
vations by private banking institutions under the designation as financial
agent for the United States Government to meet the banking needs of civilian
and military personnel assigned to the reservation. A facility is not permitted
to conduct a general banking business with the public at large. Since the
facility is operated for the United States Treasury, the latter's policy is to
cover the costs of operation by maintaining adequate deposits of federal
funds with the parent institution providing the service in order that it incur
no loss.






COMMERCIAL BANKING


The Government is also aware of the fact that most of the bankless
areas cannot as yet support full-time sited banking facilities. It does
feel, however, that multiple area servicing units, operating under
proper safeguards and alert supervision, might well prove to be the
answer to the situation. For this reason, the Commonwealth's Secre-
tary of the Treasury, as Supervisor of Banks, after considerable
study of the matter, has indicated his willingness to grant a permit to
Banco Popular to operate the experimental unit mentioned above
from the bank's Manati branch. Banco Popular would be given this
special privilege simply because it was the first to promote the idea
in Puerto Rico. The period of experimental operation would run from
one to two years, during which time no additional permits for this
type of service would be granted to any other institution subject to
Commonwealth jurisdiction. Before the experiment could get under
way, however, the approval of the Federal Deposit Insurance Cor-
poration would also have to be obtained, and this approval would
have to cover each location at which the mobile unit would render
banking services. This is because Banco Popular is an insured bank
and also because each location at which the unit would engage in
business is regarded under federal law as a branch.
In an effort to get the project under way, Banco Popular filed a
request to operate the experimental unit with both the Common-
wealth's Secretary of the Treasury and the Federal Deposit In-
surance Corporation. This was some time ago. While the former has
already expressed himself in favor of the undertaking, the latter has
as yet to render a decision on the request. It should be added in this
respect that several similar proposals have been advanced in recent
years on the mainland. The Comptroller of the Currency, it is under-
stood, has disapproved applications submitted by national banks.
Supervisors of state banks, who have had such proposals before them
have taken similar action with but one exception. The State Authority
for Maine on one occasion approved an application for vehicular
banking service but this action was rescinded soon thereafter. Ex-
perience to date would thus seem to indicate that in spite of any
advantages that the mobile unit is believed to possess, approval of
its introduction is still to be had from mainland authorities.
It is recognized that an operation like this one is bound to create a
number of new situations, but none it would seem that careful at-
tention and alert supervision could not handle. For example, if
operation of the experimental unit proved successful, one of the







BANKING GROWTH IN PUERTO RICO


first problems with which the banking authorities would undoubtedly
have to reckon at an early date would be the competition for locations
among the banks of the island. It would no doubt be understood that
the mobile unit would not be permitted to conduct operations in
those communities already serviced by a fixed banking office. And it
might be added that it is also the prevailing view in the island that
such a unit would not be allowed to replace an existing branch which
is paying its way. Experience in the future, however, might show
that some points now serviced by fixed branches are marginal opera-
tions which might conceivably be serviced more economically and as
effectively by a mobile unit.
There is the element of safety to be considered, too, even though
the possibilities of robbery, for example, are minimized by all in
Puerto Rico who would be directly concerned. The record shows
that there has never been a bank hold-up or robbery in Puerto Rico.
This obviously does not mean that there could not be a first time. In
the case of the experimental unit, Banco Popular would equip it
with two-way radio communication with the branch office at Manati.
It would also have the protection of an armed driver-guard. Adequate
insurance protection would also be carried.
The presence of such a "bank" would have a definite educational
value in the communities served. It would tend to discourage the use
of the old family "strongbox." Small shopkeepers would be encour-
aged to get away from the practice of hiding the day's receipts around
the house. Then, too, it would diminish in importance the r61e of,
and the dependency upon, the merchant-bankers and private lenders
who, on the whole, thrive especially in bankless areas at the expense
of the community.

OPERATIONAL ASPECTS OF COMMERCIAL BANKING
More industries, greater agricultural output, substantial increases
in the volume of trade with the mainland, along with numerous other
factors, have increased the r6le and the importance of the island's
commercial banks. The activity of these institutions is reflected in
changes in the volume of deposits held by them, in their loan and
investment operations, and in the various services performed for
customers.
In discussing the activity of commercial banks, it must be re-
membered that unlike other private financial institutions they alone







COMMERCIAL BANKING


possess the power to create and destroy money, that is, bank credit
or demand deposits. These banks, however, also perform a number of
non-commercial banking functions, such as, operating savings and
safe-deposit departments, serving as trustees, executors and admin-
istrators of estates, brokers, and so on. The record of their per-
formance is discussed in some detail below.

BANK DEBITS
Reference is first made to the trend of bank debits, for these pro-
vide a direct measurement of the extent to which depositors are
using the funds in their commercial bank accounts. The picture in
this respect for the past decade is presented in the following table.
Here a steady rise is noted since December 1944 in the total dollar
volume of deposit funds which have been put to use by their owners,
attaining approximately an 80 per cent gain by June 1954. The per-
centage gain is considerably much greater if 1954 data were compared,
for example, with 1940 figures.
Breaking down the overall bank debit totals into their several
components, it can be seen that the real dollar volume increase over
the past decade, one of nearly 150 per cent, was registered in the use
of private checking deposits. This, of course, reflects the increased
tempo of business activity which has taken place in recent years
throughout the island. Significant, too, is the change that has taken
place in the debits to private savings and time accounts. Although
the figure has more than doubled over the past ten years, due to the
sizable increase that has taken place particularly in the volume of
private savings, the turnover nevertheless has remained small and
subject to very little fluctuation. As for changes in the activity of
government accounts, as also noted in Table 8, these are to be ex-
pected, reflecting as they do the variety of forces that influence their
volume. For example, the sharp decline in bank debits to the current
accounts of the Commonwealth and municipal governments after
1944 can in important measure be ascribed in the main to changes
in their financial position effected by the termination of World War
II. In the last few years, the figure has again been on the increase
reaching a high in June 1954. The explanation for this no doubt is
the impact of economic expansion efforts and the important r6le
played in this connection by the Government of Puerto Rico.







40 BANKING GROWTH IN PUERTO RICO

TABLE 8. BANK DEBITS IN PUERTO RICO, DECEMBER 1944-JUNE 1954
($ millions)

Common-
Private ommon- wealth and eral
M wealth and Federal
LastDayoPrivate Savigs a i en
Monthly Current Govern- m Its D
Total Time ment' Imentso met and
Accounts ments' Its De-
Accounts Depots, Current pendencies
etc. Accounts Savings
SAccounts Accounts

Dec. 1944........... $194.1 $105.8 $3.1 $51.4 $23.7 $10.0
June 1945............ 182.1 132.8 3.4 23.6 22.4
Dec. 1945............ 190.7 119.8 4.2 26.2 5.0 35.4
June 1946............ 212.8 153.4 5.0 30.0 24.4
Dec. 1946............ 178.0 132.4 3.8 21.3 20.6
June 1947........... 245.1 194.6 5.3 31.1 2.0 12.2
Dec. 1947........... 241.6 179.8 5.0 39.8 17.0
Dec. 1950............ 243.8 184.9 5.3 38.6 0.3 14.6
Dec. 1951............ 286.8 207.2 5.2 41.9 0.1 32.3
Dec. 1952............ 358.5 257.1 7.1 58.8 2.8 32.6
1953
July ............... 350.1 257.4 7.2 53.9 0.6 31.1
August .............. 325.7 237.8 7.0 45.9 1.7 33.3
September........... 325.1 240.8 6.2 51.5 1.5 25.1
October ............. 328.5 233.6 6.6 52.2 1.0 35.0
November........... 289.4 215.9 5.8 42.5 1.1 24.0
December.......... 355.4 258.9 7.1 43.5 2.9 42.9
1954
January ............. 309.1 211.4 6.4 38.6 1.1 51.6
February........... 311.8 234.9 6.2 45.1 0.9 23.7
March............... 418.1 308.9 8.5 70.9 0.6 29.1
April................ 355.1 273.1 7.1 46.8 0.2 27.8
May................. 348.9 267.8 7.0 49.4 1.1 23.6
June .............. 355.9 263.1 7.5 56.6 1.3 27.3

Less than $50,000. Totals rounded.
(Source: Commonwealth of Puerto Rico, Department of the Treasury,
Bureau of Bank Examinations.)

NET ASSET INCREASE
In terms of resources, the commercial banks have registered an
important dollar gain over the past twelve years. Data supporting
this statement are presented in Table 9. Here we see an increase in
the 1942-1953 period of nearly 300 per cent in the net asset holdings
of locally chartered institutions and a 52 per cent gain in the case of
the non-Commonwealth chartered banks.







COMMERCIAL BANKING


TABLE 9. TOTAL NET ASSETs OF COMMERCIAL BANKS, FOB SELECTED YEABS
(As of June 30--000)
1942 1951 1952 1953

Banco Popular de Puerto Rico... $22,177 $65,173 $71,280 $76,431
Banco Credito y Ahorro Ponceno.. 14,025 55,664 61,299 63,450
Banco de Ponce.................. 9,979 46,937 54,026 42,385
Roig Commercial Bank.......... 1,551 3,478 3,943 4,577
Credit Union Bank.............. 365 3,308 3,582 3,910
Banco de San German............ 1,033 1,743 1,969 2,172
Banco de Economias y Prestamos 477 1,704 1,772 2,001
Banco de San Juan (Progreso Fi-
nanciero)..................... 199 977 1,220 1,761

Total-Locally Chartered........ $49,806 $178,984 $199,091 $196,687

National City Bank of New York $62,014 $89,137 $78,318 $77,623
Chase National Bank of New York 8,571 20,118 23,774 24,957
Royal Bank of Canada........... 7,719 14,660 14,333 14,065
Bank of Nova Scotia............ 7,626 8,882 13,128 13,823

Total-Non-Commonwealth
Chartered Banks.............. $85,930 $132,797 $129,553 $130,468

Grand Total-All Commercial
Banks........................ $135,736 $311,781 $328,644 $327,155


(Source: Commonwealth of Puerto Rico,
Bureau of Bank Examinations.)


Department of the Treasury,


It will be noted that a slight drop is recorded for 1953 over the
previous year in the total net assets of the island's commercial banks.
An examination of the data shows that most of the decline is in the
figures of Banco de Ponce, with much of the change attributable to
bookkeeping presentation rather than economic conditions. For
example, this institution shows a drop in 1953 in net assets of about
$11.6 million. Looking at the record, we find that the account "due
from branches" declined by about $8 million and loans by approxi-
mately $4 million. Much of the explanation of this drop, however, is
found by examining the liability side of the ledger. There we note
that "due to branches" shows a reduction for this same period of
about $7.4 million and rediscounts of $3 million. It thus appears that
Banco de Ponce was reporting in 1952 "due from branches" and






BANKING GROWTH IN PUERTO RICO


"due to branches" separately, while in 1953 the accounts were
netted, thus showing only the small balance of "due from branches."
The drop of $4 million in the 1953 loan figure was substantially ac-
counted for by a decrease of about $3 million in the liability item
"rediscounts" and an increase of $832 million in the investments of
this institution. (See Table 20.)
Bank assets, like any other properties, must be assessed not only
quantitatively but also qualitatively. Good assets constitute strength,
for the capacity of an institution to pay is measured by the amount,
distribution and character of its resources. Good assets, however,
do not come by easily. Their quality is a practical measure of a bank's
management upon whom depends in very large measure an institu-
tion's ability to maintain its solvency, liquidity, and its profitability.
BANK DEPOSIT RISE
The volume of deposits has risen substantially since 1942 in the
commercial banks of the Commonwealth. We note in Table 10 that
the dollar volume of deposits in the locally chartered banks increased
by nearly 350 per cent in the period 1942-1953. The remaining com-
mercial banks show a 35 per cent increase for this same period.
A good part of the dollar increase in the volume of these deposits is
directly due to the increase in the holdings of public funds. During
the early years of the economic expansion program, that is, the war
years, considerable revenue accrued to the local government from
rising sales of rum. The highest point was reached in 1945. The
greater part of these funds was kept with the island's commercial
banks in both demand and time accounts. With the conflict over, the
volume of public deposits held by these institutions began to drop off,
the decline continuing until 1950 when the impact of the war in Korea
caused their volume once again to increase.
Details in the fluctuation of public deposits since 1943, Pue
Rican and Federal, are presented in Table 11. It will be noted that
holdings of public funds by the national banks in Puerto Rico dropped
sharply, that is, by nearly $21.8 million, between June 30, 1948, and
June 30, 1949. Practically all of this drop took place in the govern-
ment's account with the National City Bank. During that year, de-
posits of the Puerto Rican government with the Government De-
velopment Bank increased by $8.7 million. This reflects the change
in policy introduced by the government with respect to maintaining







COMMERCIAL BANKING


TABLE 10. TOTAL DEPOSITS (PUBLIC AND PRIVATE), FOR SELECTED YEABS
(As of June 30--000)
1942 1951 1952 1953

BancoPopulardePuertoRico. ... $18,572 $58,188 $63,788 $68,602
Banco Credito yAhorroPonceno.. 10,287 49,830 53,106 55,899
Banco de Ponce ................ 7,380 34,122 37,560 37,464
Roig Commercial Bank.......... 1,000 2,897 3,333 3,877
Credit Union Bank.............. 288 2,854 2,941 3,231
Banco de San German........... 854 1,405 1,616 1,799
Banco de Economias y Prestamos 377 1,355 1,405 1,609
Banco de San Juan (Progreso Fi-
nanciero)..................... 110 729 982 1,485

Total-Locally CharteredBanks.. $38,868 $151,380 $164,731 $173,966

National City Bank of New
York.......................... $61,407 $84,375 $72,213 $72,160
Chase National Bank of New
York......................... 8,548 18,600 20,482 18,360
Royal Bank of Canada........... 7,667 11,908 11,860 12,754
Bank of Nova Scotia............ 2,834 4,244 5,808 5,434

Total-Non-Commonwealth
Chartered Banks.............. $80,456 $119,127 $110,363 $108,708

Grand Total-All Commercial
Banks........................ $119,324 $270,507 $275,094 $282,674


(Source: Commonwealth of Puerto Rico,
Bureau of Bank Examinations.)


Department of the Treasury,


as substantial a volume of its funds as previously with the National
City Bank of New York.
As a matter of public policy, a major portion of the local govern-
ment's treasury surpluses accumulated during the war years went to
finance the broad development program of the Puerto Rican Govern-
ment. These were principally in the form of investments in capital
assets, such as improved transportation, power and irrigation proj-
ects, school houses, roads, and playgrounds. This proved fortunate,
for they contributed measurably not only to the development of a
suitable environment for industrial development, but also to the
great needs of the people of Puerto Rico for these basic services.
Economic activity generated by the investment of public funds,













TABLE 11. PUBLIC DEPOSITS IN PUERTO RIco, 1943-1953
($000)


Government of Puerto Rico


National
Banks

$47,646
85,462
54,871
59,777
39,889
44,647
22,869
27,243
23,587
20,674
21,492


Canadian
Banks

$140
60
41
16
26
35
17
16
584
584
584


Govern-
ment De-
velopment
Bank


$ 3,613
10,550
7,678
13,174
13,174
21,834
24,034
21,080
16,860
16,224


Total
P.R.

$ 62,676
122,403
110,844
112,107
98,470
97,124
77,694
95,430
91,257
80,557
80,327


Local
Banks

$ 481
2,030
17,423
11,313
498
549
520
649
2,818
3,269
3,447


U. S. Government

Govern-
National Canadian ment De- Total
Banks Banks velopment U. S.
Bank

$12,462 $12,943
10,007 12,037
10,376 27,799
9,346 20,659
15,031 15,529
15,818 16,367
9,821 $2 10,343
11,602 12,251
11,720 3 14,541
13,822 2 17,093
9,699 3 13,149


Grand
Total



$ 75,619 0
134,440
138,643
132,766
113,999
113,491
88,037
107,681
105,798
97,650
93,476


Year
June 30


1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953

(Source: (


Local
Banks

$14,890
33,268
45,382
44,636
45,381
39,268
32,974
44,137
46,006
42,439
42,027


Commonwealth of Puerto Rico, Department of the Treasury, Bureau of Bank Examinations.)







COMMERCIAL BANKING


TABLE 12. PRIVATE DEPOSITS OF COMMERCIAL BANKS, FOE SELECTED YEARS
(As of June 30--000)
1942 1951 1952 1953

Banco Popular de Puerto Rico.... $13,179 $41,473 $47,698 $50,201
BancoCredito y AhorroPonceno... 7,702 33,241 38,102 42,936
Banco de Ponce .................. 5,621 21,281 25,930 26,457
Roig Commercial Bank........... 801 1,901 2,341 2,970
Credit Union Bank............... 218 1,869 1,905 2,078
Banco de San German............ 749 1,333 1,414 1,598
Banco de Economias y Prestamos. 345 980 1,042 1,248
Banco de San Juan (Progreso Fi-
nanciero) .... ................ 110 478 590 1,001

Total-Local Chartered Banks..... $28,725 $102,556 $119,022 $128,489

National City Bank of New York. $20,259 $56,026 $46,051 $47,517
Chase National Bank of New York. 4,531 11,642 12,148 11,811
Royal Bank of Canada........... 7,569 11,324 11,275 12,170
Bank of Nova Scotia ............. 2,833 4,241 5,805 5,432

Total-Non-Commonwealth
Chartered Banks ............... $35,192 $83,233 $75,279 $76,930

Grand Total-All Commercial
Banks.......................... $63,917 $185,789 $194,301 $205,419

(Source: Commonwealth of Puerto Rico, Department of the Treasury,
Bureau of Bank Examinations.)

and the pursuance of government policies conducive to acceleration
in economic expansion, soon left its impress upon the economic
well-being of the island's population. One measure of the gains re-
corded in the years following the war is the quantitative increase that
took place in the island's commercial bank deposits, particularly in
the increased holdings of private deposits. This picture is presented
in Table 12. In the 1942-1953 period the Commonwealth chartered
banks registered a 347 per cent increase and the remaining com-
mercial banks a 119 per cent increase in the volume of private de-
posits.
The volume of private deposits held by the Commonwealth
chartered banks on June 30, 1953 represents an increase of nearly
$100 million over the June 30, 1942 figure, while the non-Puerto
Rican chartered institutions registered an increase of about $42 mil-









TABLE 13. PRIVATE DEPOSITS OF COMMERCIAL BANKS, BY CLASS, FOR SELECTED YEARS
(As of June 30-$000)


Banco Popular de Puerto
R ico .......... .......
Banco Credito y Ahorro
Ponceno ..............
Banco de Ponce........
Roig Commercial Bank.
o Credit Union Bank......
Banco de San German..
Banco de Economias y
Prestamos.............
Banco de San Juan

T otal................


$ 8,954 $ 4,225 I -


5,462
3,882
469
146
400

182
40

$19,535


2,224
1,673
332
45
349

163
70

1 9,081


$13,179


7,702
5,621
801
218
749

345
110

128,725


$ 25,442

19,163
13,403
972
1,278
623

429
153

$ 61,463


$15,906

13,492
7,800
766
501
710

518
295

$39,994


125 |1 41,473 1$ 29,231 118,416 1$ 51 $ 47,698 $ 28,940 $20,181 1$1,080 |I 50,201


33,241
21,281
1,901
1,869
1,333

980
478

1102,556


21,110
15,510
1,297
1,392
637

480
284

1 69,941


15,813
10,359
1,043
469
777

556
306

147,739


38,102
25,930
2,341
1,905
1,414

1,042
590

$119,022


22,380
14,234
1,540
1,528
742

570
380

$ 70,314


18,989
11,920
1,427
525
856

665
621

$55,184


42,936
26,457
2,970
2,078
1,598

1,248
1,001

1128,489


National City Bank.... $15,903 $ 4,356 $20,259 $48,854 $ 7,172 5$ 6,026 $ 38,716 $ 7,300 $ 35 $ 46,051 $ 39,648 $ 7,702 $ 167 $47,517
Chase National Bank.... 3,718 808 $ 5 4,531 10,118 1,454 $ 70 11,642 10,497 1,571 80 12,148 10,145 1,622 44 11,811
Royal Bank of Canada.. 5,541 2,028 7,569 8,664 2,660 11,324 8,695 2,580 11,275 9,703 2,467 12,170
Bank of Nova Scotia.... 2,009 824 2,833 3,080 1,161 4,241 4,678 1,127 5,805 4,301 1,131 5,432

Total....... ....... $27,171 $ 8,016 $ 5 $35,192 $ 70,716 $12,447 $ 70 $ 83,233 $ 62,586 $12,578 $ 115 $ 75,279 $ 63,797 $12,922 $ 211 $ 76,930

Grand Total .......... $46,706 $17,097 $114 $3,917 $132,179 52,441 $1,169 $185,789 $132,527 $60,317 $1,457 $194,801 $134,111 $68,106 $3,202 $205,419

(Source: Commonwealth of Puerto Rico, Department of the Treasury, Bureau of Bank Examinations.)







COMMERCIAL BANKING


lion for this same period. This shows an increase for the locally char-
tered banks of approximately two and one-half times that of the
non-Commonwealth chartered institutions. No doubt a substantial
portion of this gain was due to the intensity with which the locally
chartered banks sought to attract funds in Puerto Rico. For one thing,
they paid a higher rate of interest on time deposits. The other institu-
tions, namely, the local branches of the national and Canadian banks,
are in a somewhat different position in this particular respect. Whereas
the Puerto Rican institutions must look to local resources for loan
funds, or else borrow them from correspondent banks, these other
institutions need only tap their respective head offices should the
need for additional funds develop. Details in this respect are pre-
sented in connection with the discussion below on "Loan Expansion."
(See page 50.)
Locally chartered institutions, as indicated above, have been
looking in recent years to time deposits, especially those in savings
accounts, as an important source of working funds. Data in this
respect, shown in Table 13, substantiate this observation. In June
1942 the Commonwealth chartered banks held approximately $9
million in savings deposits. This compared with $8 million for the
non-locally chartered banks. By 1951, the Puerto Rican institutions
held nearly $40 million in savings deposits against $12.5 million for
the remaining commercial banks. These amounts increased in 1952
to $47.7 million and $12.6 million respectively for these two groups,
and to $55.2 million and $12.9 million in 1953. Thus we have sizable
increases recorded for the island-chartered banks with very little
quantitative change shown for the other commercial banks, namely,
the branches in Puerto Rico of both the national and Canadian
institutions.
STRENGTHENED CAPITAL STRUCTURE
The Commonwealth chartered commercial banks have managed
to increase their respective capital structures to proportions com-
mensurate with their growth. Taking the 1942 figure as the base
year, it will be seen in Table 14 that the capital accounts of these
institutions, in the aggregate, increased by 287 per cent by June
30, 1951; 313 per cent by June 30, 1952; and by 331 per cent by
June 30, 1953.
Mere quantitative increase by itself, however, does not necessarily







BANKING GROWTH IN PUERTO RICO


TABLE 14. CAPITAL, SURPLUS AND UNDIVIDED PROFITS OF COMMONWEALTH
CHARTERED COMMERCIAL BANKS, FOR SELECTED YEARS
(As of June 30- 00)
1942 1951 1952 1953

Banco Popular de Puerto Rico........ $1,680 $5,609 $6,001 $5,999
Banco Credito y Ahorro Ponceno..... 1,406 4,050 4,495 5,279
Banco de Ponce..................... 1,555 3,902 4,025 4,023
Roig Commercial Bank ............... 156 476 569 645
Credit Union Bank................... 69 218 376 384
Banco de San German................ 167 287 336 354
Banco de Economias y Prestamos..... 91 285 357 378
Banco de San Juan (Progreso Fi-
nanciero).......................... 88 112 191 205

$5,212 $14,939 $16,350 $17,267


(Source: Commonwealth of Puerto
Bureau of Bank Examinations.)


Rico, Department of the Treasury,


signify an increase in the strength and soundness of these institutions.
One of the important things is whether or not these banks are operat-
ing within the framework of an adequate capital structure. This is
fundamental for it points up the measure of protection being afforded
depositors. For example, if a bank's capital structure is not growing
at least at the same rate as deposits, this could mean that the margin
of protection afforded depositors is shrinking, unless there are other
factors offsetting the trend.

TABLE 15. CAPITAL-DEPOSIT RATIOS OF COMMONWEALTH CHARTERED
COMMERCIAL BANKS, 1949-1953
($ million)
Deposits
December Capital Ratios
Public Private Total

1949 $40.0 $ 83.7 $123.7 $14.5 11.7
1950 53.9 92.3 146.2 15.2 10.4
1951 53.8 117.8 171.6 15.4 8.9
1952 49.6 122.2 171.8 16.1 9.4
1953 (May) 47.7 124.7 172.4 17.1 9.9

(Source: Commonwealth of Puerto Rico, Department of the Treasury,
Bureau of Bank Examinations.)






COMMIERCIAL BANKING


Table 15 shows that the capital-deposit ratio for Commonwealth
chartered commercial banks has stood up well in recent years. It
is realized, of course, that there are great differences of opinion as
to what is a desirable capital-deposit ratio. In this connection the
policy of the Federal Deposit Insurance Corporation, which has
applicability to its members in Puerto Rico, is enlightening. The
F.D.I.C. says that in judging the adequacy of the capital structure
of a particular bank, it believes several factors must be considered.
The most important of these is the soundness of the management
policies. The measure of management policies is the quality and
diversification of the bank's assets. Other factors determining the
adequacy of capital are the trend of deposits, the earnings and
dividend record, the volume and nature of fiduciary business, and
the ratio of capital to total assets. If in the light of such factors
capital is considered inadequate, correction is recommended. These
may include (1) improvement in management policies relating to the
selection and administration of assets; (2) greater retention of earn-
ings; and (3) sale of additional common stock.
To indicate that a bank has adequate capital, so-called "capital
cushion ratios" can be calculated. One of the most useful is the
percentage of adjusted capital to average adjusted total assets.
Such ratios for the local banks are prepared by supervisory authorities
who use them for purposes of analysis. Their importance in analysis
is recognized, particularly in a fast-changing economy, for there
can be real danger of asset depreciation which, if not offset by an
improved capital position could remove some of the cushion of pro-
tection to which depositors are absolutely entitled, as well as other
creditors and also the stockholders of a bank.
Since the above computations for individual banks are not publicly
available, a rough idea of the ratio of equity of bank stockholders
to bank assets can be had for the locally chartered banks by cal-
culating ratios of total capital to total net assets (excluding per
contra and reserves). Here are the ratios for selected years and a
comparison of the figures with national ratios computed by the
Federal Deposit Insurance Corporation. (See Table 16.)
From these computations, it is interesting to observe that the trend
in the capital-asset ratio, keeping in mind that no "adjustments" in
these accounts have been made, declined somewhat in 1950 and
1951, turning up again in 1952 with the trend of ascendancy con-







BANKING GROWTH IN PUERTO RICO


TABLE 16. RATIO OF BOOK CAPITAL TO NET TOTAL ASSETS OF COMMON-
WEALTH CHARTERED COMMERCIAL BANKS, 1949-1953
(S million)
Decmr Book Net Commonwealth U.S.
Decber Capital Total Assets Ratio Ratio

1949 $14.5 $149.7 9.7 6.9
1950 15.2 172.0 8.8 6.8
1951 15.4 204.4 7.5 6.7
1952 16.1 203.4 7.9 6.7
1953 (May) 17.1 207.1 8.3 6.9 (Dec.)
(Source: Commonwealth of Puerto Rico, Department of the Treasury,
Bureau of Bank Examinations.)

tinuing in 1953. A comparison of these figures with national ratios
furnishes a guide to judge an acceptable capital structure. On this
basis, the local institutions compare very well with the national
average. The picture appears even brighter, however, when the
comparison is made on a state breakdown. If the common ratio of
8.3, shown in Table 16 for May, 1953, is compared with December
31, 1953 averages prepared by the F.D.I.C. for all insured com-
mercial banks, Puerto Rican chartered banks would compare well
with the United States national average of 6.9.

LOAN EXPANSION
In recent years, up to 1952, growth in loans accounted for the
major increase in assets of commercial banks in Puerto Rico. For
example, total loans increased from 1942 to 1952 by $141.2 million
and net asset volume by $192.9 million. In other words, 73 per cent
of this expansion in bank assets was due to the substantial rise in
bank loans. In 1953, however, the total dollar volume of loans dropped
off, due in important measure to cautioning by the Commonwealth's
Supervisor of Banks who, in view of the sizable increase in com-
mercial bank loans in 1951-1952, advised the locally chartered
institutions to move carefully in their lending operations. Details on
the loan volume of all commercial banks in Puerto Rico since 1942
are presented in Table 17.
Examining the data in Table 17, we note that the decline in the
1953 dollar volume of loans is reflected in the sharp increase in the
investment portfolio of Banco Popular (see Table 20) and in the








COMMERCIAL BANKING


TABLE 17. TOTAL LOANS OF COMMERCIAL BANKS, FOE SELECTED YEARS
(As of June 30--000)


1 1942


1951


1953


Banco Popular de Puerto Rico.... $7,451 $33,593 $38,485 $36,385
BancoCredito y AhorroPonceno... 5,831 25,652 31,970 35,618
Banco de Ponce................. 4,624 18,348 21,732 17,621
Roig Commercial Bank........... 784 1,213 1,265 1,462
Credit Union Bank............... 164 1,189 1,548 1,778
Banco de San German............ 277 695 700 746
Banco de Economias y Prestamos. 203 648 759 816
Banco de San Juan (Progreso Fi-
nanciero)...................... 129 628 629 839

Total-Locally Chartered Banks... $19,463 $81,966 $97,088 $95,265

National City Bank of New York. $9,186 $34,227 $45,155 $44,728
Chase National Bank of New York. 1,819 12,207 18,360 19,757
Royal Bank of Canada........... 4,318 11,171 10,629 9,740
Bank of Nova Scotia ............ 6,671 7,262 11,490 11,925

Total-Non-Commonwealth
Chartered Banks ............... $21,994 $64,867 $85,634 $86,150

Grand Total-All Commercial
Banks......................... $41,457 $146,833 $182,722 $181,415

(Source: Commonwealth of Puerto Rico, Department of the Treasury,
Bureau of Bank Examinations.)


decline of rediscounts in the accounts of Banco de Ponce with a
corresponding decrease in the volume of loans of that institution,
as shown in Table 17. Looking at Banco Popular's investment figures
for 1953 (Table 20), we see that an increase of about $7.8 million was
registered over 1952. This expansion in security holdings offsets not
only the $2.1 million decline in the loan volume but also the $4.8
million increase in the deposit volume of that institution in 1953.
(See Table 10.)
Any discussion on the subject of lending always points up the
source of funds used in these operations. As already noted, the Puerto
Rican institutions depend heavily upon local deposits to meet the
borrowing requirements of their customers. This source is supple-
mented regularly by advances from correspondent banks. The non-








BANKING GROWTH IN PUERTO RICO


TABLE 18. COMMERCIAL BANKS IN PUERTO RICO, LOANABLE DEPOSITS AND
LOANS AS OF MAY 31, 1953*
($ millions)
Com- S. Loans
Institution mercial Sants Total (including
Deposits osoverdrafts)

National City Bank of New York .......... $39.2 $7.7 $46.9 $45.1
Royal Bank of Canada ................. 9.4 2.5 11.9 10.2
Bank of Nova Scotia ................... 4.0 1.1 5.1 11.8
Chase National Bank of New York........ 10.3 1.6 11.9 20.7
Banco Popular de Puerto Rico........... 27.6 20.0 47.6 35.3
Credito y Ahorro Ponceno ................ 22.7 18.7 41.4 33.8
Banco de Ponce .................. ..... 15.3 11.8 27.1 18.6
Roig Commercial Bank ................... 1.1 1.4 2.5 1.4
Banco de San German ................. .. .7 .8 1.5 .8
Banco de Economias y Prestamos......... .6 .7 1.3 .8
Banco de San Juan (Progreso Financiero).. .4 .6 1.0 .9
Credit Union Bank ................... .... 1.7 .5 2.2 1.9

Totals. ................ ............ $133.0 $67.4 $200.4 $181.3

Not including Commonwealth or Federal Government Deposits.
(Source: Commonwealth of Puerto Rico, Department of the Treasury,
Bureau of Bank Examinations.)


Commonwealth chartered institutions, on the other hand, although
they too welcome local deposits, they need only look to their re-
spective head offices when the need arises for additional loan funds.
Thus we see in Table 18 that both the Bank of Nova Scotia and the
Chase National Bank actually had outstanding on May 31, 1953 a
loan volume far in excess of the size of their respective loanable
deposit holdings in Puerto Rico. As for the Royal Bank of Canada
and the National City Bank, their respective loan volumes on this
date came close to equalling their holdings of local loanable deposits.
In these cases all four institutions mentioned above obviously had to
bring in additional financial resources via their head offices in order
to meet the demand of local customers for loan funds. As for the
locally chartered institutions, the situation is basically different.
It is true that the amount of loans made by them continues high in
relation to their loanable deposits, which fact explains their heavy
dependency on mainland correspondents for additional financial
resources; nevertheless, they do look primarily and incessantly to







COMMERCIAL BANKING


the local population and businesses for the raw material of their
operations, namely loanable deposits.
The largest component in the lending of all of the island's commer-
cial banks continues to run in favor of commerce and industry, the
latter including sugar mills and sugar cane farming. In recent years
the volume of loans on real estate has risen substantially, due to a
combination of factors, including an increase in the real income of
the island's population generated by the industrialization program,
the availability in Puerto Rico of the facilities of the Federal Housing
Administration, and the marketability on the mainland of F.H.A.
insured mortgages. The existence of these factors explains the at-
traction that such financing has had to most of the island's bankers.
Instalment credits, too, have increased, reflecting the basic economic
changes that have taken place in the island's economy.
Data on the various classes of loans are gathered regularly by the
Federal Deposit Insurance Corporation. A special breakdown cover-
ing operations of all insured banks in Puerto Rico, as of June 30 and
December 31, 1953, is shown in Table 19.
Every loan, of course, involves a degree of risk. In this respect
the island's bankers are in a good position to know their economy as
well as their customers. Their concentration is upon business in
Puerto Rico. They are also aware of their obligations as bankers.
Excellent roads throughout the island give them easy accessibility to
the offices, factories, warehouses, and even the homes of their cus-
tomers. In short, the advantages existing provide them with every
opportunity to observe the recognized standards of good banking.
With respect to loans, these are reflected in the banker's avoidance
of "dead" accounts, tie-ups of bank funds in heavy inventories, a
substitution of bank funds for inadequate permanent working capital
of borrowers; also, in his insistence upon periodic clean-up by bor-
rowers of matured obligations.
The island's bankers are also in a position to assure that the loan
portfolio is adequately diversified, and that their loans are always
supported by adequate credit information so as to avoid weak and
unduly large lines of credit. It is understood that every effort should
be made to keep credit files current and complete, especially with
respect to earnings statements, reconcilements of net worth of
borrowers with previous statements, inventories (a breakdown is
always sought by type of merchandise, etc.), meaningful breakdowns






TABLE 19. LOANS AND DISCOUNTS, BY CLASSES, OF ALL INSURED COMMERCIAL
BANKS (COMMONWEALTH CHARTERED AND NATIONAL BANKS) IN PUERTO
RIco, JUNE 30 AND DECEMBER 31, 1953
($000)
June 30 December 31
o Branches Locay- Branches
Total c=Y of Total charred o
k Nationa Banks National
banksBanks Banks

Loans and discounts, gross
total.................. $16,2 44 896,601 S5,6458 148,6655 $95,483 548,119


Commercial and industrial
loans (including open
market paper)........
Loans to farmers directly
guaranteed by the
Commodity Credit
Corporation ..........
Other loans to farmers (ex-
cluding loans on real
estate) ...............
Loans to brokers and dealers
in securities ..........
Other loans for purchasing or
carrying securities....
Real estate loans:
On farm land............
On residential properties:
Insured by Federal
Housing Administra-
tion.................
Insured or guaranteed by
Veterans Administra-
tion ..................
Not insured or guaran-
teed by FHA or VA..
On other properties.......
Other loans to individuals:
Retail automobile instal-
ment paper...........
Other retail instalment
paper .................
Repair and modernization
instalment loans......
Instalment cash loans.....
Single-payment loans.....
Loans to banks............
All other loans (including
overdrafts) .........


$69,8211$42,2761$27,545 $64,854 $41,290 $23,564


16,195



231

3,801


8,564


14,8941 13,109


456

1,072
7,793


4,979

2,084

7,592
12,523
4,590
665

15,548


412

998
6,977


1,620

772

933
11,541
3,801
629


7,631


74
816


3,359

1,312

6,659
982
789
36


9971 14,551


16,575 10,977


208

2,163



16,733


444

1,137
5,393


4,901

1,779

5,681
14,170
3,725
210

5,430


1501 58


2,163



14,830


398

1,057
4,187


1,633

408

964
12,741
3,266
168

1,052


80
1,206


3,268

1,371

4,717
1,429
459
42

4,378


(Source: Federal Deposit Insurance Corporation, Washington, D. C.)
54






COMMERCIAL BANKING


of all asset and liability items, and also with respect to borrower's
assets in other businesses.
The island's bank supervisory authorities, of course, get into the
picture of a bank's lending operations. Inspections cover a number of
details, as pointed out earlier in this text, not the least of which are
those dealing with the borrowings by the banks themselves. It is
recognized that any substantial volume of funds originating from
bank borrowings can at times prove to be evidence of weakness, un-
less of course they are made to meet legitimate seasonal or temporary
needs and providing they are not intended as substitutes for bank
capital. Bank examiners are ever on the alert to be sure that the
island's banks themselves are not engaged in heavy borrowings
merely to get into uncertain financing, or to take advantage of a
spread that may exist at any time between the interest rate that
can be charged customers and the rate that it itself must pay for such
borrowed funds. The temptation they understand, can be great at
times, but not without real dangers. Borrowings which in effect serve
merely to cover up an overextended loan position or assets of poor
quality are recognized as signs of weakness, and these are matters
which the authorities are ever on the alert to detect.
Also of particular interest to the island's banking supervisor as
well as the F.D.I.C. are the loan policies of individual institutions,
particularly the criteria that govern a bank's lending to various
classes of borrowers, the technical analysis made of a borrower's
capacity to use borrowed funds profitably, to repay, etc. Overdue
loans obviously are carefully analyzed and investigated to determine
whether or not they are potentially sound and collectible. Of course,
the authorities are always interested in knowing precisely what a
bank is actually doing to retain sufficient profits in its capital account
to cover losses from loans which are bound to occur from time to
time.
The purpose in touching upon the foregoing points is simply to
stress the fact that loan growth in Puerto Rico has not only been
substantial in recent years, but that it has not taken place at the
expense of weakness.

INVESTMENT ACTIVITY
While the loaning function of the commercial banks in Puerto
Rico is one of the most important of these institutions, the same may







BANKING GROWTH IN PUERTO RICO


well be said of their investment activity. This statement should be
qualified to exclude the local branches of the two Canadian banks.
As a matter of policy, these institutions state that they utilize all
available resources in their local lending operations, none of their
funds being currently invested in securities or transferred to Canada
for investment. By way of contrast, the Puerto Rican branches of
the two national banks show their investment holdings in securities
of the United States Government; the branches themselves hold no
securities of the Commonwealth Government or of local public
corporations. However, substantial amounts of securities of both
the Commonwealth Government and the public corporations are
held by the head offices of these two institutions in relation to their
business in Puerto Rico.
In Table 20, it can be seen that the security holdings of the locally
chartered banks have increased substantially since 1942.

TABLE 20. INVESTMENTS OF COMMERCIAL BANKS, FOR SELECTED YEARS
(As of June 30-$000)
1942 1951 1952 1953

Banco Popular de Puerto Rico........... $7,723 $20,374 $18,935 $26,785
Banco Credito y Ahorro Ponceno........ 2,833 18,962 16,077 15,388
Banco de Ponce....................... 2,255 14,943 15,443 16,275
Roig Commercial Bank................. 270 1,359 1,353 1,323
Credit Union Bank..................... 101 1,072 1,161 1,324
Banco de San German................... 98 480 470 459
Banco de Economias y Prestamos........ 52 337 381 545
Banco de San Juan (Progreso Financiero).. 256 416 556

Total-Locally Chartered Banks.......... $13,332 $57,783 $54,236 $62,655

National City Bank of New York........ $2 $29,003 $14,964 $11,450
Chase National Bank of New York....... 1 350 1,450 1,450
Royal Bank of Canada.................. 7 -
Bank of Nova Scotia ................. -

Total-Non-Commonwealth Chartered
Banks................................ $10 $29,353 $16,414 $12,900

Grand Total-All Commercial Banks...... $13,342 $87,136 $70,650 $75,555


of the Treasury,


(Source: Commonwealth of Puerto Rico, Department
Bureau of Bank Examinations.)






COMMERCIAL BANKING


In 1952, a small decline in investment holdings of local banks will
be noted. This was due to minor adjustments in the portfolios of
Banco Popular and of Banco Credito y Ahorro Ponceno. Also shown
is a sharp drop in the same period of $14 million in the investment
portfolio of the National City Bank. This was due principally to the
withdrawal of securities from the local branch and transferring them
to the mainland. Although its holdings of public deposits in Puerto
Rico exceed the entire volume of its local investment holdings, that
institution keeps enough securities in the Federal Reserve Bank of
New York, earmarked as legal coverage for Puerto Rican public
deposits. Such securities do not appear, and apparently they need
not, in the portfolio of the branch in Puerto Rico. The same ex-
planation holds in the case of the Chase National Bank, where a
similar situation exists.
In an important degree, the increase in security investments by
the island chartered institutions reflects the increase in their holdings
of public deposits, which under the Commonwealth's Banking Code
require 100 per cent coverage with "acceptable collateral."
Since the amount of government deposits held by local institutions
is substantial, this means that a good percentage of their investment
portfolio is pledged as security for these funds. This fact is more
clearly seen in Table 21, a tabulation of government deposits and
investments held by banks in Puerto Rico on May 31, 1953.
A breakdown of the security holdings of the locally chartered
commercial banks, and also of the branches in Puerto Rico of the two
national banks, is shown in Table 22 prepared from F.D.I.C. data.
Investments of all insured banks in Puerto Rico ran at about a
quarter of the total resources of these institutions in 1953. As for the
locally chartered banks, their holdings of obligations of the Federal
Government comprised about 50 per cent of their security portfolio
on June 30, 1953, and about 42 per cent at the close of 1953. And on
both of these dates, approximately 75 per cent of the U. S. Govern-
ment securities held had maturities of 5 years or less. Investments of
this kind possess the advantages of safety and liquidity, both highly
desirable attributes.
The balance of the securities held on June 30 and December 31,
1953, by these institutions (only the locally chartered banks) com-
prised obligations of the Commonwealth and public corporations
(approximately $25 million on both dates), and other bonds, notes,







58 BANKING GROWTH IN PUERTO RICO

TABLE 21. GOVERNMENT OF PUERTO RICO DEPOSITS AND INVESTMENTS OF
COMMERCIAL BANKS, AS OF MAY 31, 1953
($000)
Puerto Rican
Government Investments
Deposits

Banco Popular de Puerto Rico ..................... $19,596 $30,687
Credito y Ahorro Ponceno......................... 13,860 17,134
Banco de Ponce .................................. 11,089 16,510
Roig Commercial Bank............................ 902 1,319
Credit Union Bank .................. ............. 1,167 1,318
Banco de San German.......................... 203 470
Banco de Economias y Prestamos .................. 356 631
Banco de San Juan................ ............ 501 566

Totals....................................... $47,674 $68,635

National City Bank of New York ................. $24,651 $11,450*
Chase National Bank of New York .................. 5,976 1,450*
Royal Bank of Canada ............................ 584 -t
Bank of Nova Scotia ............................. 1 -t

Although public deposits of the local branches of both national banks are
substantially higher than the amounts of their respective security portfolios,
such deposits are covered by a sufficient amount of securities held in the
Federal Reserve Bank of New York, earmarked as coverage for Puerto Rican
public deposits. Such securities do not appear, and need not as a matter of law,
in the portfolios of these two national banks.
t No funds invested in securities.
(Source: Commonwealth of Puerto Rico, Department of the Treasury,
Bureau of Bank Examinations.)


and debentures, including obligations of U. S. Government corpora-
tions and agencies not guaranteed by the Federal Government ($4.7
and $4.0 million for June 30 and December 31, 1953, respectively).
It will be noted that these banks do not hold any stocks of private
companies. As for banks subject to the Commonwealth Banking
Code, although the law does not expressly prohibit the purchase of
stocks by a bank, the Secretary of the Treasury, in his capacity
as Supervisor of Banks, has construed the omission to mean a pro-
hibition. What has been deemed to be "investment securities"
within the meaning of the Banking Code is left to the Treasurer of
Puerto Rico for determination.







COMMERCIAL BANKING


TABLE 22. SECURITY PORTFOLIO OF INSURED COMMERCIAL BANKS IN PJUETO
Rico, AS OF JUNE 30 AND DECEMBmE 31, 1953
_________($000)
June 30 December 31

Locally- lca Branches
Total Natnal Total National
ba National banksNational
s Banks banks Banks

Securities-total............... $74,178 861,S78 *12,900 68,22S1850,8$1 S12,900

Obligations of the United
States Government-
total.. ................ $43,696 $30,796 $12,900 $34,184 21,284$12,900
Direct:
Treasury bills ........... 98 98 -
Treasury certificates of
indebtedness ............ 1,210 210 1,000 1,300 300 1,000
Treasury notes ........... 19,407 16,907 2,500 16,718 14,218 2,500
United States non-market-
able bonds.............. 2,480 80 2,400 2,480 80 2,400
Other bonds maturing in 5
years or less............ 13,799 6,799 7,000 8,137 1,137 7,000
Other bonds maturing in 5
to 10 years............. 3,109 3,109 1,346 1,346 -
Other bonds maturing in 10
to 20 years ............ 3,125 3,125 4,169 4,169 -
Other bonds maturing
after 20 years ........... 434 434 -
Guaranteed obligations
(FHA debentures)...... 34 34 34 34 -

Other securities-total........ 30,482 30,482 29,037 29,037 *
Obligations of States and
subdivisions............ 25,820 25,820 25,063 25,063 -
Other bonds, notes, and
debentures ............ 4,662 4,662 3,974 3,974 -
Federal Reserve bank stock. -
Other corporate stocks...... -

Securities of the Commonwealth Government and the public corporations
are held by the head offices in their respective bond portfolios.
(Source: Federal Deposit Insurance Corporation, Washington, D. C.)
BANKING RESERVES
Not all of the money of the depositors can be loaned or invested
by commercial banks. Some of it is required by law to be kept as a
legal reserve. Another portion, as dictated by experience, is held






BANKING GROWTH IN PUERTO RICO


more or less idle in the banks themselves and in correspondent
institutions, as a working reserve for such purposes as servicing the
requirements of customers, e.g., making payments on checks drawn
by customers, cashing checks for customers, payment of bank ex-
penses, and meeting contingencies. Any amount these institutions
may have over and above such requirements as these, they may loan
or invest to earn income for their stockholders.
With respect to the amount that must be maintained as legal re-
serves, it is important to note that the requirements differ for each
of the three categories of commercial banks operating in Puerto
Rico, namely, the locally chartered, national, and Canadian institu-
tions. Full details in this respect are presented in the author's earlier
text on "Money and Banking in Puerto Rico." Briefly stated, these
differences are as follows:
(a) The Commonwealth chartered banks must maintain a minimum
legal reserve of 20 per cent against demand liabilities,8 computed as
follows: not less than six and two-thirds per cent in lawful money of
the United States; not more than three and one-third per cent in
the form of checks on island banks; and the remaining ten per cent
in the form of inter-bank deposits.9 In addition, these institutions
are required to maintain the remaining 80 per cent of the total
amount of demand liabilities in personal or other fully guaranteed
securities due in a term of not more than 180 days. The Commercial
Banking Code, it should be added, also gives the island's Treasurer
discretionary power to increase the minimum legal reserves from
twenty to thirty per cent when, in his judgment, circumstances so
require. Any such change, however, does not become operative until
thirty days after its pronouncement.
Note that the law does not prescribe the holding of a legal reserve
against time deposits. It should also be observed that these institu-
tions are required to hold their own legal reserves. Working cash for
till and vault must, of course, be in addition to the amount required
as part of the legal reserve.
(b) With respect to the national banks in Puerto Rico, as "foreign"
branches of mainland member institutions, they operate under the
jurisdiction of the Board of Governors of the Federal Reserve System,
8 Which include all obligations a bank is obliged to pay within three days.
9 Deposits of these banks in the clearing account with the Government
Development Bank may be counted as part of legal reserves.






COMMERCIAL BANKING


which is authorized to prescribe the amount, character and location
of reserves to be maintained against deposits received in such
branches. As of this writing, it is understood that the Board has not
prescribed any actual legal reserve requirements for the branches in
Puerto Rico of the two mainland national banks. It should be added,
however, that these institutions, as a matter of strict practice them-
selves maintain at all times a minimum reserve of twenty per cent
against both demand and time deposits.
(c) The branches in the island of the two Canadian banks, in the
matter of legal reserves, are subject not only to the Commonwealth
requirements applicable to the locally chartered banks, but also to a
special provision of law applicable to "foreign" banks, namely that
they must retain in Puerto Rico, either as cash, loans, property, or
securities of the federal or local government, an amount equal to 75
per cent of their total deposits, demand and time, in Puerto Rico.
Another detail of importance is that the Puerto Rican branches of
both the Canadian and national banks have direct recourse to their
respective head offices for funds in the event of need. This supple-
mentary source of funds has already been explained. Insofar as the
branches of the national banks are concerned, the head offices may also
appropriately apply to the Federal Reserve Bank of New York for
credit should the necessity arise. As for the locally chartered banks,
under such circumstances they normally tap their established lines
of credit with correspondents. The alternative for them would be to
liquidate loans or investments in portfolio.
The fact that the locally chartered banks now operate two-thirds of
the banking offices and facilities in Puerto Rico accounts for the
so-called "excess reserves" problem being associated with them rather
than with the non-Puerto Rican institutions. This fact has a direct
bearing upon the average volume of excess reserves maintained by
these institutions. The record shows that the Commonwealth char-
tered banks have continuously held excess reserves in amounts
which at first glance might be regarded by some as being out of line
with requirements. Data in this respect are presented in Table 23.
Thus, an average excess reserve figure like $10 million might well
sound out of line for these Puerto Rican institutions. But, is it?
One of the local institutions, Banco Popular, whose data are in-
cluded in Table 23, operates 19 banking offices and servicing units
throughout the island. These are presently staffed with a number of








BANKING GROWTH IN PUERTO RICO


TABLE 23. LEGAL RESERVE POSITION OF COMMONWEALTH CHARTERED
COMMERCIAL BANKS, 1947-1953
($000)


Date


1947
June ...........
December ......
1948
June...........
December ......
1949
June...........
December ......
1950
June ...........
December ......
1951
June...........
December ......
1952
June...........
December ......
1953
June...........
December ......


Total
Demand
Liabilities


$53,940
49,944

49,366
44,462

48,656
45,427

48,572
53,776

61,463
74,629


20
Per Cent
Legal
Reserves


$10,784
9,989

9,873
8,892

9,731
9,085

9,714
10,755

12,293
14,926


70,711 14,142
75,590 15,118

70,313 14,063
67,325 13,465


$13,839
15,352

13,655
13,647

12,438
14,434

11,337
15,032

11,250
15,527

13,526
16,335

13,734
13,981


Checks in
Process
of Col-
lection


Due
from
Banks


$1,724 $5,293
1,566 4,994


1,558
1,448

1,563
1,484

1,569
1,757

2,009
2,451

2,332
2,465

2,276
2,195


4,815
4,396

4,813
4,461

4,857
5,378

5,749
7,463

7,071
7,559

7,031
6,732


(Source: Commonwealth of Puerto Rico, Department
Bureau of Bank Examinations.)


Total
Compo-
sition


120,854
21,912

20,028
10,491


Excess



$10,066
11,925

10,157
10,599


18,813 9,082
20,379 11,283


17,763
22,166

19,008
25,440

22,929
26,359

23,041
22,908


8,050
11,411

6,717
10,515

8,787
11,241

8,979
9,444


of the Treasury,


commercial tellers, paying and receiving; also with savings, personal
loan, and exchange tellers. Accumulating at these points are soiled
and mutilated bills to be transferred to San Juan for credit through
the Cash Custody Account. A careful check shows that these "needs"
tie up cash resources at this writing of approximately $5 million.
At this point a word of caution is in order. The term "excess re-
serves" is also used throughout the mainland where, as in Puerto
Rico, it describes the "excess" held over the amount legally pre-
scribed to be held. But this is where the parallel stops. For example,
member banks of the Federal Reserve System are required by law
to hold minimum reserves equal to a stated fraction of their deposit
liabilities, demand and time. Furthermore, these reserves must be






COMMERCIAL BANKING


kept in the form of deposits with Federal Reserve Banks. Most im-
portant, however, legal and excess reserves of member banks on the
mainland are related to a mechanism of central banking. This permits
them to make the fullest utilization of their resources with the as-
surance that should they experience unexpected drains on their
reserves, they may appropriately and directly apply to a Reserve
Bank for credit and receive accommodation immediately. The
chartered banks of the Commonwealth, of course, do not as yet
have this splendid facility available to them in Puerto Rico. When
the term "excess reserves" is used to describe the data presented in
Table 23, it should be done so with full knowledge of the nature of
the data, so as to allay any possible confusion with the use of the
same term to describe "excess reserves" of member banks.
Thus to give the "excess reserves" shown in Table 23 the main-
land meaning of the term can prove confusing indeed. For one thing,
their being labeled "excess reserves" is not to imply that they are
not being employed in the most effective way possible. They are idle
in the sense that they are not being used to support a multiple ex-
pansion of demand deposits. Not that these institutions would not
prefer that such funds be put to work earning income. Their officers,
however, have serious legal and moral obligations in the handling of
funds entrusted to their care. These reserves, and their volume, must
at all times be adequate to meet unforeseen as well as foreseen con-
tingencies. They are the first line of defense of a bank. In Puerto
Rico, then, the chief significance of these excess reserves is not their
rWle in determining the extent to which banks may expand their
loans and investments, and thus the volume of their deposits; rather,
their function, in the absence of direct recourse to Federal Reserve
facilities, is that of insuring at all times the capacity of these com-
mercial banks to meet the withdrawal demands of customers.
On the mainland, and because of reforms introduced in the early
1930's which enlarged the capacity of Federal Reserve Banks to
come to the aid of commercial banks in times of need, the importance
of excess funds as a guarantor of solvency was lessened indeed. To-
day, the basic r6le of excess reserves on the mainland is essentially
that of determining the extent to which banks may expand their
loans and investments, i.e., the volume of their demand deposits.
This is not to mean that the individual banker on the mainland need
no longer worry about his obligation to pay in response to the de-






BANKING GROWTH IN PUERTO RICO


mands of depositors. He still has this responsibility but in his cal-
culations he is fully aware of available avenues for the replenishment
of reserves, particularly his accessibility to Federal Reserve Bank
credit. Where the possibility of confusion arises is in thinking that
no basic differences exist between island-bank operations and those
on the mainland tied in directly with the Federal Reserve mechanism.
There are important differences and these give the term "excess re-
serves" a different meaning and significance for Puerto Rican banks
on the one hand and, on the other, for members of the Federal Reserve
System.
The same is true for other important concepts, such as "legal
reserves." Here in Puerto Rico the legal reserve requirements of
Commonwealth chartered banks are at present based upon the
principle of strengthening the liquidity of these institutions. They
are not directed to, and have little if any effect upon, controlling the
expansion of bank credit. This, of course, is in direct contrast with
the significance of the concept in the case of member banks of the
Federal Reserve System. In this instance, reserve requirements are
regulated by the Federal Reserve with the thought of controlling
the volume of money in circulation as a means of promoting economic
stability.
Also having an important bearing upon the matter of excess re-
serves is the operation of the Cash Custody Account in Puerto Rico,
which is discussed earlier in this text. Some of the branches of the
island's commercial banks are located at considerable distances from
San Juan where the United States Treasury's Cash Custody Account
is held. The result is that more cash is tied up at such points than if
the branches were nearer to San Juan. This fact makes it impractical
to operate these outlying offices with exact minimum cash reserves.
Then, as already explained in the section on the Cash Depot in
Puerto Rico, the red tape involved in the operation of the arrange-
ment, that is, the strict classification of bills and sorting require-
ments of the United States Treasury, takes considerable time with
the result, as one banker put it, that by the time a delivery of an
excess is made to the Cash Depot a new excess has already taken
place.
The need of holding adequate cash reserves against time and
savings accounts is also a matter not to be overlooked, especially in
view of the fact that the local banking law does not require Puerto







COMMERCIAL BANKING


Rican chartered banks to maintain a legal reserve against such
deposits.
There are other factors varying in importance at different times
which also enter into the picture of so-called "excess reserves."
Among these is the prospective turnover of a bank's deposits. Here
the nature of the deposits must be carefully taken into account, that
is, whether they are long or short-term in character. The number of
depositors and the size of average balances also must come in for
consideration. The seasonality of the business of the bank's customers
understandably carries a particular importance in this respect here
in Puerto Rico. Another important factor that influences local
bankers in this respect is the need of maintaining adequate reserve
cushion to absorb the impact in Puerto Rico of any disrupting
economic influences originating on the mainland.
Then, there is the necessity on the part of locally chartered banks
to maintain sizable balances with their correspondent institutions.
This is not because they will be needed to meet withdrawals of de-
positors, but rather because they are the means of assuring the
Puerto Rican banks of access to a variety of services provided by the
correspondents. In this sense, such deposits are in effect compensating
balances. This dependency on correspondents incidentally is ac-
centuated because of the island's geographical position and also be-
cause of the absence in Puerto Rico of direct access to a Federal
Reserve institution.
In deciding how large excess reserves must be to cover requirements
for all such purposes as indicated above, the Commonwealth char-
tered banks are obliged also to consider sources of replenishment in
addition to those of correspondents. This puts the focus on the sec-
ondary reserves of these institutions, principally that portion of its
security holdings not already pledged which it is felt could be con-
verted into cash quickly without any significant loss.
Above all, the absence of a central reserve system, or more exactly
the lack of direct access to the credit facilities of the Federal Reserve
System, perhaps explains more than any other single factor the
reasons why the local banks find themselves compelled to pursue the
practices and enter into the arrangements they do which, in effect,
produces what appears to be at quick glance an illusion of a con-
dition of piling up idle unproductive funds during a period when
their employment in Puerto Rico is sorely needed.







BANKING GROWTH IN PUERTO RICO


When the credit creating power of local commercial banks becomes
more fully coordinated and integrated with that of the Federal Re-
serve mechanism, the concept of "excess reserves" in Puerto Rico
will indeed take on a different significance. Under these circum-
stances the principle of multiple expansion also would take on a new
meaning. In accordance with this principle, a reserve requirement of
20 per cent under Puerto Rican law, for example, would enable the
Commonwealth chartered banks, as a group, theoretically to expand
by five times the amount of any net increase in bank reserves. This
is assuming, of course, that an adequate demand for bank credit
exists in the island. This means that demand deposit liabilities of
these local institutions could rise at the rate of about $500 for every
$100 added to reserves. Conversely, a decrease in reserves of $100
would require a contraction in demand deposits of about $500 under
present reserve requirements, unless these banks were operating with
excess reserves greater than necessary for working purposes or re-
sponded by borrowing from outside sources, for example, from cor-
respondents, the Federal Intermediate Credit Bank, etc.
It should be emphasized that this expansion of deposits by a
multiple of the increase in reserves, is possible for the banks as a
group. It is not true, however, for the single bank. Any one of these
institutions is free to loan funds it acquires from depositors and stock-
holders. Deposits originating from loans and investments, however,
tend to get into circulation in the course of business, with the result
that they tend to increase demands on the originating bank for cash,
with a consequent reduction in its cash resources. This works out
differently, however, if all of the banks are expanding their loans and
investments. This is because the individual bank is likely to be re-
ceiving new deposits and cash claims upon other banks. In short, the
deposits and reserves do not leave the banking system as a whole but
are merely transferred from bank to bank, thus enabling the banks as
a group to expand, if they so choose, by a multiple of its reserves. It
should be pointed out that any conversion of demand to time deposits,
of course, would result in a decline in the potential for expansion of
demand deposits.
Certainly it cannot be said that the locally chartered institutions
themselves are overlooking very many sound loaning opportunities.
The growth in their loan volume over recent years would seem to
indicate a responsiveness on their part to the increasing needs of a







COMMERCIAL BANKING


growing economy. This is a rapidly expanding economy and one that
requires an increasing supply of money to facilitate its growing
volume of transactions. If the momentum of the Government's
economic expansion efforts is to be maintained and, in fact, ac-
celerated in accordance with its plans, the money supply will have to
expand to meet the increased needs for cash balances resulting from
the additions to productive capacity and from the growing com-
plexity of the island's economic organization. As a matter of fact one
gets the feeling that every bit of available business is keenly being
chased by these institutions. If evidence to support this statement
were needed, the rapid expansion of branches throughout the island
by the local banks should prove beyond doubt that they are driving
hard for customers whose commercial banking requirements they can
service.
To think for a moment that these institutions are "freezing"
precious dollars by keeping reserves well in excess of legal require-
ments would be indeed naive to say the least. These banks are in the
business of putting funds to work profitably. The trouble is that
there is more to the business of banking than simply manufacturing
money and stuffing borrower's pockets with it. Commercial banks,
although possessed with the unique power to create and destroy bank
credit, just do not operate in a vacuum. On the mainland, member
commercial banks also possess this power to create and destroy bank
credit but, there, they are linked to the credit creation and credit
destruction mechanism of the Federal Reserve.

BANK EARNINGS, EXPENSES, AND DIVIDENDS
Any discussion of commercial banking growth would be incom-
plete and without real meaning if the subject of earnings were not
considered, particularly with respect to their sources and their
disposition. This picture for 1952 and 1953 is presented in Table 24
for all Commonwealth chartered commercial banks. A detailed break-
down of earnings, expenses, and dividends on the basis of a grouping
of these institutions in accordance with their relative size, is given
in Appendix A. This compilation, which forms the basis of the cal-
culations made in Appendix B, may easily be reduced to percentages,
as in Table 24, for use by individual institutions in the island which
may wish to check their position against group averages, local and
national.








68 BANKING GROWTH IN PUERTO RICO

TABLE 24. SOURCES AND DISPOSITION OF TOTAL INCOME OF COMMONWEALTH
CHARTERED COMMERCIAL BANKS, 1952 AND 1953

1952 1953
Amount Per cent Amount Per cent
(In thou- of total (In thou- of total
sands) income sands) income

Sources
Loans and discounts.................. $5,651 69.0% $5,864 64.2%
U. S. Government obligations. .......... 484 5.9 544 6.0
Other securities*....................... 700 8.6 717 7.8
Service charges on deposit accounts.... 125 1.5 149 1.6
Exchange and other current earnings... 1,088 13.3 1,271 13.9
Recoveries ................ ....... 138 1.7 593 6.5

Total Income.................... $8,186 100.0% $9,138 100.0%
Disposition
Salaries and wages................... $2,807 34.3% $3,228 35.3%
Interest on deposits ................... 847 10.3 1,059 11.6
Other current expenses ............ 2,429 29.7 2,593 28.4
Charge-offs ........................... 719 8.8 491 5.4
Income taxes ....................... 217 2.7 195 2.1
Dividends to stockholders. ............ 658 8.0 743 8.1
Additions to capital accounts .......... 509 6.2 829 9.1

Number of banks..................... 7 8 -

Note: These figures are based upon data presented in Appendix A, where a
detailed breakdown is given based upon comparability in size of institution.
Earnings data of branches in Puerto Rico of insured national banks are not
available and therefore excluded.
Securities of Commonwealth and of public corporations.
(Source: Federal Deposit Insurance Corporation, Washington, D. C.)


It will be noted that data are given in 1952 for only seven of the
eight Puerto Rican chartered institutions. The eighth, Banco de
San Juan, was not admitted to insurance until January 1953, which
explains its omission in 1952. In terms of resources, this bank is the
smallest of the group, thus not altering in any significant measure
the comparability of the figures given for 1953. It should also be ob-
served that income data are not included in this table for the Puerto
Rican branches of both the national and Canadian banks. This is
because the information in this respect is not available for these
institutions.







COMMERCIAL BANKING


Rates of bank earnings are influenced by innumerable factors.
They reflect the wide differences in the character of bank assets and
bank services, as well as levels of interest rates prevailing in the money
markets of the country. They also reflect the characteristics of the
economy in which these institutions operate, as well as the conditions
governing their functioning therein. Other factors that affect rates
of earnings would include the quality of bank management and
operating personnel and the degree of competition existing among
the various financial institutions.
Loans and discounts continue to be the most important of the
earning assets of the commercial banks of the island. For the locally
chartered institutions, as indicated in Table 24, 69 and 64.2 per cent
of their total income was derived from their lending operations in
1952 and 1953 respectively. This compares with 54.8 and 56 per cent
for all insured commercial banks in the United States. When the com-
parison for 1952 and 1953 is made between island and mainland in-
stitutions of comparable size, as is done in Appendix B, the ratio of
loan income to total income for the local banks continues to run well
above that of their mainland counterparts. Although a drop in the
ratio of loan income to total income was recorded by the Puerto
Rican banks in 1953, nevertheless the proportion remained sizable
and, as can be seen in Appendix B, well above the average for all
insured banks of the United States.
Next in importance as a source of income are the investments of
these banks in the securities of the Commonwealth Government and
of the public corporations of the island. Income from this source is
shown in Table 24 as 8.6 per cent of total income in 1952 and 7.8 per
cent in 1953. This category, along with that of loans and discounts,
account for over 70 per cent of the total income of all of these island-
chartered institutions. It is activity of this kind that points up the
contribution these financial institutions are making locally in further-
ing the economic expansion efforts of the people of Puerto Rico.
In spite of the limited resources of these institutions, we find them
consistently investing important sums also in obligations of the
Federal Government. Income from these investments has been run-
ning in the neighborhood of 6 per cent of the total in the past two
years. Investing in United States Government securities is of course
in line with the principles of sound banking. In the first place, they
are as good as cash itself, while at the same time earning income for






BANKING GROWTH IN PUERTO RICO


stockholders. Then, too, they contribute to the diversification of
bank investments. It is true, for example, that income from these
federal securities in 1953 accounted for 6 per cent of the total income
of locally chartered banks, whereas it accounted for over 21 per cent
in this same year for all insured banks in the United States. Com-
parison in this respect with all insured commercial banks in com-
parable size groups is presented in Appendix B for 1952 and 1953.
This wide variance, which is characteristic of earlier years too, is no
doubt due in principal measure to the basic differences prevailing in
institutional structures. An example of these differences would be
the inaccessibility of the locally chartered commercial banks directly
to the credit facilities of the Federal Reserve System.
One source of income that looms large for all of the commercial
banks in Puerto Rico is the "exchange" derived from the handling of
inter-island-mainland checks and fund transfers between the two
areas. The precise amount obtained in this way is not published by
these institutions, the figure being merged with "Other Current
Earnings." The amount, however, is known to be sizable, perhaps
currently grossing for all of the commercial banks in the island well
in excess of $600,000 a year. The problem of exchange on checks and
fund transfers between Puerto Rico and the mainland is discussed at
length in a subsequent section entitled "Par Clearance and Fund
Transfers."
Before leaving the sources of income picture, the sizable increase
in "Recoveries" in 1953 should be noted in Table 24. The amount of
such recoveries in that year on assets previously charged off ac-
counted for 6.5 per cent of the total 1953 income of Commonwealth
chartered banks.
By far the largest item of expenses of the locally chartered com-
mercial banks is salaries (including director's fees) and wages. This
is made clear in Table 24 which shows that these payments absorbed
34.3 per cent and 35.3 per cent of total income for the years 1952
and 1953 respectively. This is higher than the national averages for
all insured commercial banks which were 29.5 per cent in 1952 and
29.3 per cent in 1953.
If salary and wage payments of Puerto Rican commercial banks
are compared in relation to current operating earnings with national
averages of approximately comparable size institutions, such as ap-
pears in Appendix B, we would find that the figures for the smaller







COMMERCIAL BANKING


Puerto Rican banks in this respect, although they have been running
a little higher than the national average for their respective size
groups, are closer to this average than are the larger of the Puerto
Rican banks to the national average for their respective size group.
The widest gap in this latter connection appears in 1953 when the
ratio of these expenses to current operating earnings was 39.19 for
these larger island banks against the national average of 32.40. The
explanation for the sizable difference that developed in past year's
figures no doubt, making due allowance for increases in bank per-
sonnel, can in large measure be attributed to readjustments in wage
scales resulting from required increases in minimum wage levels. On
July 13, 1953, the minimum rate was ordered raised from 58 cents to
75 cents an hour.
The salary and wage breakdown, as shown in Appendix B, also
points up another very interesting detail. While the level of salaries
of officers of the smaller local banks remains much lower than that of
the group average of all insured commercial banks of comparable size.
the opposite is true in the case of the larger of the locally chartered
banks. Here we note that in both 1952 and 1953 the proportion of
officer's salaries to earnings was at higher levels than the national
averages. With respect to salary and wage payments to employees,
however, a somewhat different picture is presented by the data in
Appendix B. Here we note that the island's banks, as classified in this
table, were well above the national averages in both 1952 and 1953,
with the smaller banks in fact paying out a substantially greater per-
centage of their current operating earnings for salaries and wages to
employees. Some further interesting details in this general connec-
tion are presented in Table 25.
Interest paid on deposits by the Commonwealth chartered banks,
as shown in Table 24, accounts for the next largest single item of
expense of these institutions. This reflects the sizable volume of
interest-bearing time and savings accounts held by these institutions,
including demand deposits of the Commonwealth Government on
which the locally chartered banks pay interest at the rate of one-
twentieth of one per cent.," This payment of interest on demand
deposits of government, although expressly prohibited in the regula-
tions of the Federal Deposit Insurance Corporation, is permitted by
1U Interest paid on time deposits of the Coimonwealth Government is
currently at the rate of one-half of one per cent.











TABLE 25. OFFICERS AND EMPLOYEES OF COMMONWEALTH CHARTERED COMMERCIAL BANKS, NUMBER AND WAGES,
1952 AND 1953
Banks with deposits of*
$1,000,000 to $5,000,000 (25,000,000 to $100,000,000
1953 1952 1953 1952
United States Puerto Rico United StatesIPuerto Rico United StatesI Puerto Rico United States Puerto Rico
($000)
Salaries-Officers ................ $119,275 $ 76 $110,394 $54 $ 87,584 $1,023 $ 78,799 $ 924
Salaries and wages-Employees.... 78,583 120 73,196 89 180,046 2,008 158,667 1,740

No. of active officers, December 31.. 24,855 22 24,319 13 9,768 187 9,369 175
No. of other employees, December
31 .......................... 36,739 75 36,108 62 66,621 1,016 62,211 953

No. of banks, December 31........ 7,459 5 7,409 4 572 3 552 3


Note: Based on data contained in Appendix A.
* Deposits are as of December 31.
(Source: Federal Deposit Insurance Corporation, Washington, D. C.)


I







COMMERCIAL BANKING 73

the F.D.I.C. in this instance in view of the practice established under
provisions of the Organic Act of Puerto Rico.
How this category of expenses, that is, interest payments on time
and savings accounts, compares with that for all insured banks in
comparable size groups is also shown in Appendix B for 1952 and
1953. These data point up an interesting fact, namely, that the
ratios of the island's smaller-sized banks run below the national
average for their group, while the opposite is true for the three largest
of the locally chartered banks when their average ratios are com-
pared with the average of all insured banks falling within the same
comparable size group. This would seem to suggest that the smaller
institutions for various reasons perhaps have not been so successful
as the larger ones in the island in attracting and in building up their
volume of time and savings accounts. Relative holdings of govern-
ment funds of course go a long way in explaining existing differences
in this respect.
Two other items in Table 24 call for mention at this point, namely,
"Dividends to Stockholders" and "Additions to Capital Accounts."
What disposition of earnings is made in these respects obviously de-
pends upon the profitability of these institutions. This picture is also
presented in Appendix B. There we see for 1953 interesting differences
in the margin of net profits between the larger and the smaller groups
of the island's chartered banks on the one hand, and groups of all
insured banks of comparable size on the other. Specifically, the net
profits after income taxes in 1953 of the smaller group of island banks
are shown as $5.74 per $100 of total capital accounts in contrast
with a figure of $8.49 for the total group of similar sized insured
commercial banks. However, the larger of the Puerto Rican banks, as
a group, show for 1953 a higher level of profits after payment of in-
come taxes than their group counterpart, that is, a figure of $9.81
as against $7.81 per $100 of total capital accounts.
If the foregoing were merged so that a ratio of net profits to capital
accounts could be calculated for all of the locally chartered insured
banks and then compared with similar ratios for insured commercial
banks by States, we would see that the ratio for the Puerto Rican
banks would be 9.4 per cent, the same as for the insured institutions
of South Carolina, but higher than the national ratio of 7.9 per cent
and also above the ratios of 38 other political units of the Federal
Union. The picture in this respect is presented in Table 26.








74 BANKING GROWTH IN PUERTO RICO

TABLE 26. NET PROFITS AFTER TAXES AND AVERAGE TOTAL CAPITAL ACCOUNTS
OF INSURED COMMERCIAL BANKS, 1953
By State or Other Area, Ranked According to Rate of Net Profit
($0000)
Ratio of
Net Profits Average Total Net Profits
After Taxes Capital Accounts to Capital
Accounts

United States and other areas......... $1,025,963 $12,941,478 7.9%

1. North Dakota .................... 3,823 32,308 11.8
2. Nevada .......................... 1,395 13,257 10.5
3. Montana ........................ 3,300 31,562 10.5
4. Alaska ............................ 457 4,377 10.4
5. Mississippi ........................ 6,687 64,268 10.4
6. Idaho ........................... 2,767 26,818 10.3
7. California ....................... 103,136 1,015,742 10.2
8. South Dakota..................... 3,835 37,619 10.2
9. Louisiana ........................ 12,626 125,655 10.1
10. Utah............................ 4,486 44,809 10.0
11. Michigan......................... 37,332 376,549 9.9
12. Arizona .......................... 3,448 35,523 9.7
13. New Mexico...................... 2,369 24,923 9.5
14. South Carolina ................... 5,142 54,658 9.4
15. Puerto Rico (Commonwealth char-
tered) ............................. 1,572 16,78 9.4
16. Oklahoma....................... 13,953 149,553 9.3
17. Georgia ......................... 14,334 153,903 9.3
18. Nebraska......................... 9,394 100,936 9.3
19. Arkansas......................... 6,519 71,280 9.2
20. Kansas.......................... 10,887 119,383 9.1
21. Wyoming ...................... 1,760 19,321 9.1
22. Minnesota ........................ 20,805 229,409 9.1
23. Virginia......................... 16,717 184,692 9.1
24. Oregon.......................... 10,244 114,192 9.0
25. Tennessee. ........... ............ 14,638 164,474 8.9
26. Missouri ......................... 29,512 331,642 8.9
27. Washington ...................... 13,059 147,647 8.8
28. Alabama ......................... 9,689 109,962 8.8
29. Florida .......................... 13,998 160,065 8.8
30. Kentucky ....................... 12,291 141,475 8.7
31. Iowa ........................... 16,113 186,737 8.6
32. Indiana .......................... 19,842 235,667 8.4
33. District of Columbia .............. 7,145 85,707 8.3
34. Illinois ........................... 77,727 933,940 8.3







COMMERCIAL BANKING


TABLz 26 (Continued)
Ratio of
Area Net Profits Average Total Net Profits
After Taxes* Capital Accounts to Capital
Accounts

35. Colorado .......................... $7,506 $91,276 8.2%
36. New Jersey....................... 30,461 376,957 8.1
37. North Carolina .................. 12,808 159,876 8.0
38. West Virginia .................... 7,561 96,256 7.9
39. Maryland ...................... 9,958 127,092 7.8
40. Ohio............................. 47,199 603,550 7.8
41. Texas.................. ........ 42,907 569,159 7.5
42. Wisconsin........................ 16,812 229,533 7.3
43. Virgin Islands ..................... 36 502 7.2
44. Connecticut..................... 9,738 140,791 6.9
45. Pennsylvania....... ......... 83,650 1,211,230 6.9
46. Massachusetts..................... 28,759 417,282 6.9
47. Maine.......................... ..... 2,980 45,934 6.5
48. New York........................ 203,704 3,148,174 6.5
49. Hawaii ........................... 157 2,450 6.4
50. Delaware ....................... 3,526 56,343 6.3
51. New Hampshire ................... 1,755 28,174 6.2
52. Vermont ......................... 1,844 30,114 6.1
53. Rhode Island ..................... 3,610 62,004 5.8

Figures do not add to total due to rounding.
(Source: Federal Deposit Insurance Corporation, Washington, D. C.)

One important item not shown separately in Table 24, but one
which is presented in Appendices A and B, has to do with taxation.
Taxes paid in 1953 by the Commonwealth chartered insured com-
mercial banks on other than net income increased considerably over
similar payments for 1952, although the percentage increase in the
case of the smaller Puerto Rican banks was much greater than that
for the larger institutions. As regards taxes paid on net income in
1953 to the Federal Government, the record shows very little change
over the previous year in the group figures of all Commonwealth
chartered insured commercial banks. Amounts paid in 1953 to the
Puerto Rican Government, however, registered a sizable decrease
over 1952 payments.
Comparison of tax payments of the Puerto Rican chartered banks
with all insured commercial banks presents an interesting picture.
See Appendices A and B. For example, the ratio of taxes other than







BANKING GROWTH IN PUERTO RICO


on net income to total operating expenses was substantially greater
for the group of smaller Puerto Rican institutions in both 1952 and
1953 than for all insured commercial banks of comparable size. Al-
though the variance was not so great for the larger group of island
banks, the proportion still was well above the national average for
institutions in the same size group. It should be added, however, that
the ratio of taxes on net income to total capital accounts was less for
both groups of insured banks in Puerto Rico than for their national
group counterparts.
Before leaving the topic of bank taxation, one other observation is
in order. This subject is full of important implications to the economy
of Puerto Rico as well as the banks themselves. The operation of
commercial banks in Puerto Rico, as elsewhere, is basically influenced
by cost factors, not the least important of which are tax payments
of varying kinds. Any inequities that might exist in the tax structure
could well provide the more favored with competitive advantages
over the remaining institutions.
The taxation of commercial banks in Puerto Rico reflects the out-
growth of fundamental legal differences existing among the three
groups of institutions operating in the island. The Puerto Rican
chartered banks are of course subject to the taxing authority of the
Commonwealth and municipal governments. The agencies of Banco
de Ponce in New York City are also subject to applicable tax pro-
visions of both the New York State and Federal Governments. The
local branches of the two national banks, on the other hand, obtain
their authority to operate from, and are subject to, the Federal
Government. This in large measure exempts them from Puerto Rican
taxing provisions. As for the two Canadian banks, here we find still
another pattern of taxation different in important respects from that
applicable to the other two groups operating in the island. As foreign
corporations, the Canadian banks are subject to Puerto Rican taxing
authority.
The important structural differences indicated above go a long way
in explaining the existence today in Puerto Rico of a complicated
bank taxation pattern. To illustrate: Commonwealth chartered
commercial banks are subject to a property tax on their capital funds
or on their real estate, whichever is the larger. Inasmuch as real
estate holdings by these banking institutions cannot by law be in
excess of 50 per cent of the paid-in capital, this tax tends to fall







COMMERCIAL BANKING


upon capital funds. These banks are also required to pay a municipal
license tax to each municipality in which an office is located. The local
national banks pay on all real estate in Puerto Rico owned by them.
The national banks, however, subject as they are to the authority of
the Federal Government, find themselves exempted in certain im-
portant particulars from Puerto Rican taxing authority. For this
reason, no personal property, municipal license, or capital taxes may
be imposed upon these institutions. Such levies may be made only
by the States in which the national banks are organized. Since na-
tional banks are not permitted to establish branches in States other
than the one in which they are originally organized, except that
qualifying institutions are authorized to operate branches in the
territories and possessions, the effect of the federal law is to exempt
national banks from the payment of taxes such as these to the Puerto
Rican Government. However, they are subject to the payment of
direct taxes to the Commonwealth Government on the net income of
their island branches. The practical effect of the real property and
income tax provisions obviously rests upon taxable earnings and real
property held by them. As branches of national banks, these institu-
tions have the additional obligation of paying applicable taxes levied
by the Federal Government. Any tax payments made by them to the
Puerto Rican Government are, of course, deductible in their federal
returns. The two Canadian banks in the island, by way of contrast,
in addition to being subject to Puerto Rican taxes on all real estate
owned by them in the island, also pay a corporation tax to the Com-
monwealth on all income earned in Puerto Rico, as well as the license
fees to those municipalities in which branches are operated. In ad-
dition, they are required to pay a capital stock tax to the Common-
wealth Government. Since none of the local branches of either
Canadian institution has a capital structure of its own, that is, one
separate and distinct from the capital of its parent bank, a special
taxing arrangement was worked out some time ago for the purpose
between these banks and the Government of Puerto Rico.
Details such as these explain why the existing bank taxation
structure in Puerto Rico is widely regarded among local bankers as
outmoded and in general unsatisfactory. With the rapid growth that
is currently taking place among these institutions, the subject of bank
taxation becomes increasingly more important. An equitable taxation
policy is, of course, essential to sound development.






BANKING GROWTH IN PUERTO RICO


From Table 26, it is clear that the profit-making capacity of the
locally chartered banks is well established. This is of basic importance
because it determines not only the attractiveness of the stock of these
banks to present holders, but it also provides (a) an incentive to the
introduction of new capital, and (b) a solid basis for adding to capital
from profits. In these ways, the cushion of protection to depositors
can be increased from any shrinkage in asset values. This is precisely
what is currently taking place in Puerto Rico.
The picture in this respect for all of the locally chartered insured
commercial banks is presented in Table 24 for 1952 and 1953. There
we note that in both of those years approximately 8 per cent of the
total income of these institutions was paid out in dividends to stock-
holders. This compares with 8.7 per cent and 8.4 per cent respectively
for all insured commercial banks of the country.
The above comparison takes on a somewhat more informative
aspect in the data presented in Appendix B. There we see that the
ratio for "Cash Dividends Declared" by the smaller institutions of
the island in both 1952 and 1953 is lower than the national average
for all insured banks in a similar size group. The opposite is true,
however, in the case of the three largest of the locally chartered banks
which, as a group, show a ratio higher in this respect than the average
of all insured commercial banks of comparable size.
Profits not distributed to stockholders are of course retained in
capital accounts. In this regard the record of the island's chartered
banks can be considered as satisfactory. Table 24 shows that 6.2
per cent of total income was added to the capital accounts of these
institutions in 1952. The following year the amount increased to 9.1
per cent. When net additions to capital from the profits of these banks
is compared with insured banks of comparable size, we find, as shown
in Appendix B, that the Puerto Rican banks in the $1-$5 million de-
posit category distributed more in 1952 than the average of all insured
commercial banks falling within this category, but less in 1953. The
opposite was true, however, in the case of the larger Puerto Rican
banks, that is, those with deposits in the $25 to $100 million group.
In their case, net additions to capital from profits were lower than the
national group average in 1952 but higher in 1953. This practice of
retaining a share of the profits in this way has proved for all of these
Puerto Rican institutions to be an important source of capital growth
in recent years.









CHAPTER IV


A
ROLE OF NON-COMMERCIAL BANKS


COMPONENTS
There are a number of other financial and credit institutions
operating in Puerto Rico in addition to the commercial banks. See
"Money and Banking in Puerto Rico" by the author for background
information on these institutions. Among them we find agencies of
both the Commonwealth and Federal Governments, as well as
institutions subject to their respective jurisdictions. The local institu-
tions are the Government Development Bank, the Puerto Rican
Bank for Co6peratives, the island chartered credit unions, and the
Government of Puerto Rico Employees Association (Savings and
Loan Fund). Those subject to federal authority are the units of the
Farm Credit Administration, the Home Finance Agency, including
the Federal Housing Administration and the First Federal Savings
and Loan Association, the latter coming under its general supervi-
sion, the Postal Savings System, the Reconstruction Finance Corpora-
tion, and the Small Business Administration.
There are, of course, other institutions in the island which engage
in financial operations, among them being insurance companies.
Some summary data on their operations are presented later in this
section.
One fundamental difference between non-commercial banking
institutions and commercial banks is that, unlike the latter, they
can neither create nor destroy money, that is, demand deposits or
bank credit; they are purely intermediaries, very important ones,
which make available for use only the funds they get from others.
Regardless of their nature or source of authority, all non-com-
mercial banking institutions have a vital r6le to play in the Puerto
Rican economy, for each in its own way can exert an important
influence on both the direction and size of the flow of spending. In
short, every one of them is an important instrument in the savings-
investment process. Following are presented some of the important
details with respect to these institutions.
79







BANKING GROWTH IN PUERTO RICO


THE GOVERNMENT DEVELOPMENT BANK
Among the institutions playing an increasingly significant r6le in
the Commonwealth's economic expansion effort is the Government
Development Bank for Puerto Rico. On the basis of its present
authority, as well as in terms of its financial activities and services,
this institution has developed into a key instrument of government
financial policy.
As this institution was originally conceived back in May 1942, it
was with an awareness of the importance attached to the need for a
financial-developmental mechanism functioning in coordination with
all other parts of the economic organization. More specifically, the
basic objective of this institution was to foster the government's
economic expansion program, particularly in cooperation with the
Industrial Development Company, by making long-term loans for
the creation of new industries and commercial enterprises. The
mandate given the Development Bank by the Legislature was clear.
It was directed to attain or help in the realization of the complete
development of the economic and human resources of Puerto Rico.
To enable this institution to achieve the purpose for which it was
created, the Legislature granted it very broad powers.
In May 1945, the Development Bank officially established a fiscal
agency division in accordance with authority bestowed upon it by
the island's Legislature, although this institution in fact had already
been recognized as the fiscal agent of the government, the municipali-
ties, and the public corporations.
The next significant change in the legal structure of the Bank came
in 1948, when this institution was legally and administratively
reorganized and given its present name of the Government Develop-
ment Bank for Puerto Rico. The change was intended to sharpen the
focus and capabilities of this institution in order that it might better
be able to help the local government in the performance of its fiscal
duties and the carrying out of its responsibility to develop the econ-
omy of Puerto Rico, particularly with respect to its industrialization.
At the present time, this institution is endowed with a number of
powers enabling it to function in several important capacities. The
more important of these at the present time are (1) its service as
fiscal agent for the Government of Puerto Rico, the specialized






R6LE OF NON-COMMERCIAL BANKS


public authorities," and the island's 76 municipalities; and (2) its
r6le in promoting the expansion and strengthening of the economy's
financial services and facilities. Included in this latter activity is the
Bank's capital lending to private industries.
Some of the powers now possessed by the Development Bank, as
well as functions performed by it, give it the semblance of a central
bank. These include (a) its fiscal agency and depository functions,
(b) its service as Settling Agent in the island's clearing mechanism,
and (c) its authority to discount eligible negotiable instruments for,
or make advances secured by such paper to, commercial banks sub-
ject to the local banking code. While the first two of these are fully
activated, little of a practical nature has yet to come of the authority
mentioned in (c) above. There are several reasons for this. In the
first place, there is no adequate structural basis existing at the present
time for the proper performance of this function. Furthermore, the
Bank itself is not yet organized to handle the specialized activities
that would be involved. While the latter deficiency can be easily
overcome, the former can not. This is because the function is one of
monetary management which cannot be arbitrarily exercised without
the dangers of producing severe disorganization in the economy of
Puerto Rico. More specifically, it is a function inseparably related to
the Federal Reserve credit mechanism. This means that if this func-
tion of the Development Bank is to be made meaningful, an effective
coordination of the island's banking and credit mechanism with that
of the Federal Reserve would first have to be developed. In this
connection, see later discussion under caption "Closer Operation of
Bank Credit Mechanism with Federal Reserve." A second require-
ment would be the enlargement of the Development Bank's powers
over money and credit in the island. This would involve, among
other things, an overhauling of the Commonwealth statute with
respect to legal reserve requirements and their possession in order to
bring it in keeping with the principles governing the determination
and holding of legal reserves on the mainland.
On the basis of the Development Bank's activities to date, its
functions appear to be concentrated principally upon its responsibility
1 These include the Water Resources Authority, the Aqueduct and Sewer
Authority, the Industrial Development Company, the Agricultural Company,
the Transportation Authority, and the Land Authority.






BANKING GROWTH IN PUERTO RICO


as fiscal agent for the government and its authority to make capital
loans to private industry.
Fiscal Agency Functions
These are performed for the Commonwealth and municipal govern-
ments; also, for the Authorities of the Commonwealth Government.
As sole instrument through which public obligations are issued, the
Bank has the task of working out all of the complexities of security
preparation and issuance, ever mindful of the impact the placing of
such securities will have upon the public credit of Puerto Rico.
Through the facilities of this institution, substantial sums of money
have already been procured both locally and in the money markets
of the mainland and applied toward the development of basic sectors
of the island's economy. A summary of Government Development
Bank financing for the Commonwealth, the municipalities, and the in-
strumentalities of the Puerto Rican Government is presented in Table
27. The total of $408.4 million shown, it should be noted, is a cumula-
tive figure of credit negotiated. According to the 1954 Annual Report
of the Commonwealth's Secretary of the Treasury, the net outstand-
ing debt of all agencies of the Government of Puerto Rico, because of
refunding operations, interim financing, and repayments, amounted
only to $165,933,781. Some examples of Bank financing follow.
The Puerto Rico Water Resources Authority, an instrumentality
of the Commonwealth Government, supplies nearly all of the total
electric energy consumed throughout the island. This Authority is
pushing forward with its comprehensive expansion program. For this
purpose, substantial sums are required. The Development Bank as
fiscal agent for the Authority has on the latter's behalf engaged in
financing operations involving some $171 million through June 30,
1954. A considerable portion of this figure is made up of refinanced
issues. Thus, of the $171 million, (a) $26.1 million was a commitment
of interim financing by the Government Development Bank. Of this
amount, the Bank actually disbursed a total of $15.8 million; (b)
$37.4 million was a commitment of interim financing by other banks.
Of this amount, these institutions disbursed $35.1 million; and (c)
$107.4 million in bond issues. This last figure does not include a bond
issue of $20 million which was floated on January 1, 1944, before the
Development Bank was entrusted with fiscal agency functions. It
should also be noted that from a bond issue of $50 million, floated on







R6LE OF NON-COMMERCIAL BANKS


January 1, 1947, the sum of $23.8 million was used to refund bonds
previously outstanding. In other words, at the time of the issue of
this $50 million, the net increase in the outstanding obligations of
the Authority was only $26.2 million. And finally, it should further
be noted that all temporary financing was settled with the proceeds
of the bond issues.
The Puerto Rico Aqueduct and Sewer Authority, as an instru-
mentality of the Commonwealth Government, is charged with the
ownership, operation and development of all public water and sewer
systems of the island. To enable this Authority to carry its expansion
program forward, the Government Development Bank has under-
taken financing operations, as its fiscal agent, totalling $40.2 million
through June 30, 1954. Of this amount, (a) $7.5 million was in interim
financing provided by the Government Development Bank; (b)
$22.7 million was the amount of a bond issue floated in 1949; and
(c) $10 million is in current interim financing. It should be noted
that from the proceeds of the $22.7 million 1949 bond issue, the
interim financing provided by the Development Bank in the amount
of $7.5 million was repaid. And finally, of the $10 million commit-
ment of interim financing, mentioned above, only $3 million has thus
far been disbursed to the Aqueduct and Sewer Authority.
The Land Authority of Puerto Rico devotes its major efforts and
an equity of about $28.7 million (as of December 31, 1953) to sugar
cane cultivation and processing. It is also energetically pursuing a
land reclamation program involving many thousands of acres. In
addition it is engaged in the cultivation of other farm products, such
as pineapples, for which there is an economic future in the island.
From time to time this instrumentality of the Commonwealth has
required sizable amounts of working capital to finance its various
operations. The greater part of these funds, which from fiscal year
1946-47 through June 30, 1954 have totalled more than $98 million,
were procured through competitive bidding under the guidance and
advice of the Government Development Bank.
The Puerto Rico Transportation Authority occupies a strategic
position in the Commonwealth's program of economic development.
Among its activities are the operation of public bus lines in the
principal cities, the development of harbor facilities, and the opera-
tion and development of air terminals. Financing in excess of $4
million has thus far been procured by the Bank for this Authority.







BANKING GROWTH IN PUERTO RICO


The Development Bank's fiscal operations are not of course limited
to the authorities of the Commonwealth Government just mentioned.
The island's 76 municipalities and the Commonwealth Government
itself are similarly serviced by the Bank in accordance with the
provisions of the Fiscal Agency Law of 1945.
As for the municipalities, these political units have the task of
caring for the construction, repair and maintenance of public facili-
ties such as streets, squares, cemeteries, and parks. For the financing
of the more important of these projects, these communities resort to
the public credit, utilizing regularly, for example, the services of the
Development Bank in connection with the issuance of bonds. These
municipalities also have recourse to interim financing provided by
the Bank, when it is agreed that permanent financing should be
deferred because of existing conditions in the money market, and
when the immediate need is not for a lump amount but for a gradual
contribution of funds to finance the particular construction at hand.
Through June 30, 1954, the volume of Development Bank financing
for the municipalities approximated $37 million in all categories. Of
this amount, nearly $14 million was in interim financing, $10.6
million in refunding operations carried out by the Bank, and the
balance in loans negotiated by the Bank through direct negotiations
or by public bids in either the local or continental markets. With
respect to financing for the municipalities, it should be stated that
this activity is carried out by the Bank only after it has received
official approval from the Secretary of the Treasury that the proposals
at hand are in order and that they may be duly pursued. A full break-
down of this financing is presented in Table 27.
TABLE 27. SUMMARY OF GOVERNMENT DEVELOPMENT BANK FINANCING FOR
THE COMMONWEALTH, THE MUNICIPALITIES, AND INSTRUMENTALITIES,
JULY 1944 THROUGH JUNE 1954
Num- Net Total Credit
ber of Interest Maturities Negotiated
Loans Cost (0S00)

A) For the Commonwealth:
Commonwealth Government
Issues ..................... 8 1.94% 7/1/45-74 $41,100
to
2.55%
Commonwealth Government
Refunding Operations..... 5 2% 7/1/57-61 5,013

Total for Commonwealth Government ..................... $46,113







R6LE OF NON-COMMERCIAL BANKS


TABLE 27 (Continued)


B) For the Municipalities:
Municipal Issues purchased
by Government Develop-
ment Bank...............


Refunding Bonds of 1947....
Refunding Bonds of 1950....
Refunding Bonds of 1950....
Refunding Bonds of 1951....
Public Improvement Bonds
Series of 1950, 1951 and
1952.......................

Municipal Loans negotiated
with local banks through
the Government Develop-
ment Bank...............


Num- Net
berof Intrest
Loans Cost


2%%
to
3%%
2%
3%
2%



3% to
3%%



2%%
to 5%


Total for Municipalities...........


Maturities


7/1/46-69 $13,959


7/1/48-63
7/1/50-69
7/1/51--65
7/1/52-62


7/1/53-67




7/1/50-69


5,657
1,935
1,022
2,020


1,919




10,341


$36,853


Number of
Operations
C) For the Instrumentalities:
Water Resources Authority ............... 16 $170,852
Puerto Rico Industrial Development Com-
pany...... ............................. 2 11,500
Aqueduct and Sewer Authority ............ 6 40,200
Puerto Rico Agricultural Company......... 2 400
Puerto Rico Transportation Authority...... 3 4,125
Land Authority of Puerto Rico............. 16 98,397

Total for Instrumentalities............................. $325,474

Grand Total...................................... 408,440*

This is a cumulative figure of credit negotiated. Because of refunding
operations, interim financing, and repayments, the net outstanding debt of all
agencies of the Government of Puerto Rico on June 30,1954 amounted only
to $165,933,781. (See Annual Report, Secretary of Treasury of Commonwealth
of Puerto Rico, 1954, Table 3, p. 30.)
(Source: Government Development Bank for Puerto Rico.)


Total Credit
Negotiated
(3000)






BANKING GROWTH IN PUERTO RICO


The financial services provided the municipalities by the Bank
comprise an important undertaking. There are 76 municipalities and
for each one the Bank gathers, classifies and analyzes financial and
statistical data in order to provide a current picture principally for
investors and investment firms having a present or potential interest
in the public obligations of these Puerto Rican communities. In this
general connection, it might be noted that the Bank has recently
undertaken the publication of a "Quarterly Report to Investors."
The purpose of the reports is to keep investors in all categories of
Puerto Rican securities informed of all events of consequence bearing
upon the island's progress and plans as well as its problems. Mention
of Puerto Rican securities points up the record of the Commonwealth
Government and its political subdivisions, as well as the Authorities,
all of which can boast of the record that they have never defaulted
or been delinquent in the payment of principal or of interest on any
obligations, either direct or indirect, or have any of them resorted to
forced or "managed" refunding of maturing bonds to avoid default.
Interim financing facilities of the Development Bank, incidentally,
have thus far been used not only by the municipalities but also by
the public corporations. This accommodation is aimed at saving the
economy important sums on interest costs, since borrowings in this
way entail a charge only on funds actually in use. Funds so employed
by the Bank are either from its own sources,12 or, as has often been
the case, part Development Bank funds with the balance secured by
it under a participation arrangement with a commercial bank. Ac-
cording to the Bank's records, the $14 million in interim financing
provided the municipalities over the past decade came from the
Bank's own funds, with nearly all of the municipalities of Puerto
Rico taking advantage of this accommodation. In addition, the
Bank has actually disbursed to the instrumentalities interim finances
totalling $65.5 million over the past ten years, with an additional
$12 million already planned for the Water Resources Authority in
1955.
As noted earlier, the Secretary of the Treasury of Puerto Rico, on
behalf of the Commonwealth Government, also has recourse to the
fiscal services of the Development Bank. Through June 30, 1954, for
12 Which consists principally of the Bank's own capital as well as the de-
posits held by it of the Government of Puerto Rico and the public corporations.
(See Appendix D.)






R6LE OF NON-COMMERCIAL BANKS


example, refinancing and new financing operations carried out by the
Bank for the Commonwealth Government have been in excess of
$46 million. In addition, the Secretary of the Treasury also utilizes
the facilities of the Development Bank, along with those of the
island's commercial banks, as a depository for governmental funds.
The volume of such deposits held with the Development Bank on
June 30th of each of the past six years is shown in Appendix D, a
comparative statement of condition of this institution.
Putting together the various components of this institution's
financing over the past ten years for the Commonwealth, the mu-
nicipalities, and the authorities, we get the summary picture pre-
sented in Table 27.
The Loaning Function
The loan policy of the Government Development Bank from its
inception has been to further the development of the economy of
Puerto Rico, particularly with respect to its industrialization. Ef-
fective implementation of this policy, however, has for varying reasons
thus far proven difficult. In the first years of the Bank's operation,
which was a war period, there was little demand for industrial credits.
This being the case, this institution turned to investing in long-term
real estate loans, since a real need of the time was for the financing
of structures, such as hospitals, office buildings, and the like. Par-
ticipation in this activity was encouraged by the fact that no other
sources of funds were available to finance such construction, with the
exception of private lenders whose rates were considered exorbitant
for such purposes. When the war came to a close, the Development
Bank took up the servicing of loans of an industrial character, as one
of its principal objectives in the development of industry in Puerto
Rico.
How far the Development Bank has been able to carry through
with activities in this respect is borne out by the record. It is under-
stood that the loan figures shown in the comparative statement of
condition in Appendix D do not tell the story, for they only show
outstanding balances on particular dates. A review of the Bank's
loan operations discloses that this institution has actually disbursed
357 loans through June 30, 1954 to the private sector of the local
economy for a total of $15,708.633. Of this amount, $12,861,939 or







BANKING GROWTH IN PUERTO RICO


81 per cent was granted to local interests. The number of loans so
disbursed was 303, or the equivalent of 84 per cent. During the 1953-
54 fiscal year, 58 loans totalling $2,438,876 were disbursed. Of the
number of loans, 44 of them, or the equivalent of 74 per cent, were
extended to local industries. In terms of dollars, this amounted to
$1,670,146, or the equivalent of 68 per cent. Furthermore, of the 58
loans mentioned above, 33 of them, or 57 per cent were extended to
new ventures in Puerto Rico. In dollar amounts, this represents a
total of $1,901,947, or the equivalent of 78 per cent.
Certainly, the magnitudes in lending activity reflected above are
not indicative of the pursuance of what might be described as a
vigorous loan policy. And this is understandable since the Bank's
facilities and energies are well taken up with its very important
fiscal agency obligations; and also because structurally it still is not
organized to carry on an intensive lending operation of the kind
essential to the promotion of economic development. In addition,
the Bank's lending criteria are not conducive to important risk-taking
of the kind the Industrial Development Company is set up to handle.
What loans the Bank has made thus far have been for the most part
to established local enterprises with the lending governed by what
generally would be regarded as conservative banking principles.
Only recently has the Development Bank started to ease up on its
lending requirements, particularly with respect to capital loans to
new ventures in Puerto Rico. It now appears to be the policy of the
Development Bank to expand and accelerate its lending operations
under increasingly liberal conditions. To this end it has recently
taken steps to enlarge and increase the technical efficiency of its
loan department. Whatever the implications may be of the Bank's
new loan policy, one fact remains clear, namely, that its activities
have come to be identified principally with its "government" func-
tions, which in turn have a direct and vital bearing upon the credit
rating of the Government of Puerto Rico.

THE PUERTO RICO BANK FOR COOPERATIVES
In recent years there has been a strong movement to organize
cooperatives throughout the island. In order to accelerate their estab-
lishment, the Commonwealth Legislature in 1951 authorized the
establishment of the Puerto Rico Bank for Cooperatives. This institu-
tion is authorized to serve as a depository or fiduciary for the funds




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