Tax Problems Unique to Banks
by Sig O. JORAANSTAD
Partner, Seattle Office and
JAMES O. FUNDERBURK Principal, Charlotte Office
Presented before the Haskins & Sells Annual
Tax Conference, Chicago—October 1963
BEFORE we get into the taxation of banks let's take a brief look at the
industry. Banking has been undergoing a dynamic change. Since World War II there have been two significant trends in banking. The first has been the increasing competition from other financial institutions.
Federal savings and loan associations, mutual savings banks, and credit unions have experienced a more rapid growth in deposits as compared with the growth of time and saving deposits of commercial
banks. This in itself is interesting because commercial banks have been aggressively competing for savings accounts.
The second trend has been the increase, proportionately, of savings
accounts. In 1946 time and savings deposits accounted for only about 24 per cent of total commercial deposits; today they are over 40 per cent of total deposits. During the past eight years savings and time deposits of commercial banks increased by 118 per cent while demand deposits rose only 15 per cent.
This change has had a dramatic effect on banking. The cost of time deposits has increased operating costs tremendously and has caused banks to shift to higher-yielding loans and investments. Indicative
of the need for higher-risk and higher-yield investments is a relaxation of restrictions on real estate loans by national banks. Presently, banks can lend money on improved real estate up to 75 per cent of value and for periods of up to 20 years. Formerly, banks were limited to two-thirds of value and periods of up to ten years. This limit was susceptible to some maneuvering because a loan could provide a balloon payment at maturity provided that 40 per cent of the original loan had been amortized.
These trends have probably contributed to the increase in mergers
and also to an increase in the establishment of branches in those states where branch banking is permitted.
We also have an extremely aggressive Comptroller of the Currency.
Two of his recommendations have been particularly disturbing to the banking fraternity: one, that a national bank should be able to