State Led Banking Industry in Deposit Insurance

By Titus, Nancy Raiden | THE JOURNAL RECORD, July 28, 1993 | Go to article overview

State Led Banking Industry in Deposit Insurance


Titus, Nancy Raiden, THE JOURNAL RECORD


Providing structure and confidence to a banking system is vital to any emerging economy, and Oklahoma achieved that task in its early days of statehood by enacting a first of its kind deposit guarantee system.

The State Bank Guarantee Law of 1907 was the forerunner of similar laws adopted by other states and came 26 years before the Federal Deposit Insurance Corp. was formed in 1933.

The Oklahoma law is detailed in an article by Norbert R. Mahnken, emeritus professor of history at Oklahoma State University, in the spring issue of The Chronicles of Oklahoma, published by the Oklahoma Historical Society.

Mahnken describes early day banking in Indian Territory and later Oklahoma Territory as one in which merchants provided private banking services because there were no laws to allow for the formation of banks.

Expansion of federal and territorial laws near the turn of the century set the stage for the enormous number of banks at statehood _ 883, about half of which had begun in the previous 10 years. Oklahoma has 391 banks today.

One of the first laws enacted by the new State of Oklahoma was the Bank Guarantee Law, which effectively insured deposits in state-chartered banks. The law created the Bank Guarantee Fund, administered by the State Banking Board, which assessed all state-chartered banks 1 percent of their average deposits the previous year.

When banks failed, their assets were to be liquidated and additional money as necessary taken from the guarantee fund to pay off depositors. The bank commissioner could make an emergency assessment of the banks to raise money if the fund did not have enough.

In later years, when the number and size of bank failures grew, the banking board was given authority to issue warrants to be paid off during years with fewer failures.

At first, national banks in Oklahoma were allowed to join, but the U.S. Comptroller of the Currency later prohibited them from participating.

Oklahoma's law seemed to instill confidence in depositors. Mahnken reported that deposits in national banks declined in 1908 while state banks had a 71 percent increase in deposits. State banks saw another 68 percent jump in deposits in 1909. Oklahoma by that time had 915 banks, including 694 holding state charters.

A rash of failures from 1911 to 1913 _ due to speculative practices and closer scrutiny by examiners _ weakened the guarantee fund to the point of collapse when World War I provided an economic boom and a temporary reprieve.

Then came the bust of the 1920s, which was much like the economic collapse of the 1980s, with plunging commodity prices. The state's mining industry took a nosedive. Agricultural problems were made worse by an infestation of the boll weevil. One hundred banks failed from 1920 to 1923. Most of them were small and rural, but they took a significant toll on the guarantee fund.

State leadership problems also arose about that time. One state banking commissioner fled the state for months. Other political problems _ like the possibility of martial law being declared by Gov. Jack Walton _ took precedence over banking issues.

The guarantee fund was abolished in 1923 amid "heated debate, with inkwells thrown in the (state) House (of Representatives) and an open battle prevented only by the sergeant of arms and his helpers," according to Mahnken's report.

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