City of Melbourne Bank, officially City of Melbourne Bank Limited, was a bank in Melbourne, Victoria, Australia. It operated between 1873 and 1895. The bank was a major source of financing during the Melbourne land boom of the 1880s. The bank incurred huge losses. It survived the banking crisis of 1893, but its compulsory liquidation in 1895 and subsequent court cases revealed the true financial position of the bank and the extent of its mismanagement. Some directors and bank officers faced trial, in 1896, but were acquitted.
Foundation and growth
Early years City of Melbourne Bank had resulted from the renaming of Victoria Finance and Agency Company in October 1873. It sought subscribers for its shares in November 1873. It raised more capital in 1877. One of the bank's founders was Thomas Loader (1830–1901). It gave every sign of being a conventional, profitable colonial bank.
Bank run (June 1879) On 5 June 1879, there was a run on the City of Melbourne Bank. Depositors had been alarmed by another small bank, Australian and European Bank, suspending payment. The bank did not need assistance to make payments, although some of those intending to withdraw funds may have been dissuaded from withdrawing by the arrival of large bags of cash. Unknown to the public, these turned out to be bags of copper coins being deposited by the tramway company.
Merger (1882)
The Joint Stock Bank of Victoria, controlled by Benjamin Fink, merged with the larger, City of Melbourne Bank, in 1882. Fink and other Joint Stock Bank of Victoria shareholders received a significant shareholding in the merged banking venture, which was carried on under the name of City of Melbourne Bank. In the process, City of Melbourne Bank took over two branches outside Melbourne, at Creswick and Maryborough.
Fink remained a shareholder of the City of Melbourne Bank, until at the latest March 1891, by which time he had sold his shares. He ceased to be a director around the same time.
New building (1886)
The bank constructed a new building for its headquarters and Melbourne branch, which was completed in 1886.
London branch (1886) In 1886, the bank established a London branch, giving it access to a far larger pool of depositors. Mr Edmund Rouse was appointed manager of that branch.
The land boom
The frenzy Around 1885, the established trading banks already had large exposures to loans secured by land. Those banks began to tighten credit, which should have cooled rising land values. Initially the value of land sales fell, from a total value of around £12 million, in 1885, to around £2¼ million in 1886.
However, other entities known as building societies and 'land banks' were established, with the specific aim of lending for land purchases, or even directly investing in land and other properties. Banking laws were lax, with low barriers to entry and little regulation of banks' operations, facilitating the proliferation and growth of these new financial entities. The building societies and 'land banks' also offered attractive interest rates to depositors, and their depositors' funds fuelled increased lending. Significantly, many of the new land banks were closely connected to or effectively controlled by people who were heavily involved in land speculation, although most such institutions raised funds from investors and the public through the issue of shares.
Around 1887, the penultimate and most frenzied phase of the land boom began. It was exacerbated by the buoyant economy, booming stock market, the huge volume of funds brought into Victoria, in the form of British loans and investments, and the new land banks' lending practices.
In 1888, the stock market's capitalisation reached £50-million, but by then the booming mining sector only accounted for £3.5-million. The land and finance sector was the largest, with a total capitalisation of £33-million.
The bank and the boom In April 1887, the City of Melbourne Bank declared a 12½% dividend, on profits of £51,291 15s. 11d. Its accounts showed deposits of £11,550,000 and that it had made loans totalling £12,121,000, a relatively small proportion of which was provided from the bank's capital.
The end of the land boom By 1889, land values had risen to such an extent that it was clear to many that a speculative bubble existed. Land was the security for the many loans, and the lending organisations were heavily exposed should land prices fall, as were the share prices of the 'land banks'. Commercial and residential property was also becoming an uneconomic as a 'geared' investment. Depositors expected a 6% return, but rental yields—compressed by overly high valuations—had fallen to 2.5%. The boom in commercial property too could not last. Land sales slowed and rents began to fall, indicating that the boom had peaked.
Stocks related to land and property investments began to fall, and continued to fall. In the three years up to February 1892, the price of Mercantile Finance shares (paid-up to £2), fell in value from £9 10s to just 1s.
In December 1889, Premier Permanent Building Society suspended payments to depositors and closed its doors. There were allegations of gross mismanagement, later culminating in criminal convictions. It had lent more than three times its paid up capital and used its own loans as security. This society's secretary was James Mirams, who was among the first land boomers to have a 'liquidation by arrangement', in March 1890, paying his creditors just 2d. in the pound. He would be sentenced to a year in prison, in 1890.
The Associated Banks of Victoria conflicts of interest if banks were associated with building societies or 'land banks'. In 1889, they introduced a regulation excluding banks that had an interest in a building society.
However, it was not until the years from 1891 to 1893 that the full consequences of the excesses of the boom became apparent, through the successive financial failures of multiple 'land boomers', their various corporate structures, and ultimately some banks. The massive destruction of wealth also affected the general economy, making matters worse; businesses closed, and ceased to pay rents, depositors lost their savings, and workers lost their jobs.
The final trigger of the inevitable crash came in the form of the Baring crisis of November 1890. It related to loans made by Barings Bank to the far away country of Argentina. Argentina defaulted on loans of nearly £48,000,000 during 1890. British bankers and investors with loans to Australian banks and other financial institutions feared a repeat of the Argentinean circumstances in Australia. British funding dried up, and with it the means by which some of the land boom entities were hanging on.
Early bank failures The first of the 'land banks' to fail was the Imperial Banking Company Limited. Nearly £200,000 was lost in its collapse. It had been floated in 1886, by Sir Benjamin Benjamin (1834–1905), Lord Mayor of Melbourne. It began life making advances for land sales, but its articles of association were later amended, to allow it to buy, hold, and sell land on its own account. The bank suspended payments on 24 July 1891.
Another 'land bank', the Land Credit Bank, suspended payments on 1 December 1891. Multiple instances of fraud, perpetrated by its manager, George Nicholson Taylor, were uncovered soon afterwards. Just days later, on 4 December 1891, The Metropolitan Bank and Building Society and the Standard Bank suspended payments. The Mercantile Bank of Australia closed on 5 March 1892; its financial position had been undermined by fraud and large loans to its own directors.
Land boomer insolvencies
David Munro and Munro & Company David Munro (1844–1898), a wealthy engineer, contractor, and manufacturer of machinery, was one of the first 'land boomers' to declare his personal insolvency, in April 1890. As a contractor, Munro had built two fine bridges across the Yarra River—Princes Bridge and Queens Bridge—and two railway lines. Plunging into land speculation, he had taken large loans from banks to purchase land for subdivision. Using his wife's name, Munro had borrowed further large amounts from Benjamin Fink's Mercantile Finance, which he had also used to speculate in land. He had floated a 'land bank', Caledonian Land Bank Ltd, but some of its shareholders accused him of selling his properties, at Brighton and Canterbury, into the float of that company, at inflated valuations, leading to demands that Munro buy their shares. His business David Munro and Co. Limited had a large overdraft from the City of Melbourne Bank. The bank insisted that Munro give up the management of his hitherto successful business, thereby damaging its performance. That led to a call on the shares, which he could not meet. Having run out of options, he declared insolvency, as did his wife. Munro died, in greatly reduced circumstances, of a haemorrhage and by then his chronic alcoholism, in 1898.
Benjamin Fink's failure and its impact on the bank Bejnamin Fink's partly-secured and unsecured debtors faced a combined stated deficiency of £1,019,275. The news, in October 1892, that a majority of his creditors had agreed to accept just a halfpenny in the pound on that amount—just £2,123 10s—was reported, "naturally to have startled the whole business community". The same report also stated, "in financial matters wherever there is secrecy there is suspicion, and though Mr. Fink has set a good example to other 'compounders' in openly avowing his embarrassment, a more detailed schedule of his assets and liabilities would have strengthened his position and that of his creditors." One such creditor was the City of Melbourne Bank.
When news of Fink's financial predicament reached London, the London directors of the bank cabled a straightforward question to its Melbourne office; "Are you involved in the failure of Fink? To what extent?" The bank's manager, Colin Longmuir, cabled back his answer; "Overdrafts and discounts £57,000. We are fully covered." He then provided a balance sheet—later shown to be false—which was relied upon by the directors to declare a 10% dividend, at the end of October 1892. The chairman told a shareholders meeting that "With large funds at their disposal, the directors had carefully gone through the accounts of the bank and written off such as they considered to be either valueless or not equal to the book amounts. Ample provision had been made also for contingent losses, and the bank was now in a thoroughly healthy and sound condition. Of course all these provisions had curtailed the profits of the bank, but the directors considered they were acting in the very best interests of the shareholders, and in the only prudent way."
At the time of Fink's 'secret composition', it was not known that there was in fact around another £310,000 owed by Fink to the City Bank of Melbourne. That loan was helpfully written off by the bank, in secret, probably to prevent it becoming known that the bank itself was, by then, itself facing insolvency.
Benjamin Fink's main corporate entity, Mercantile Finance, suspended payment, on 18 July 1893, by which time Fink was no longer a director, nor even a substantial shareholder, of that company. The impact on financial institutions and individuals that had accepted guarantees from Mercantile Finance—as a security for loans to other parties or for their transactions with Benjamin Fink—also began to become apparent.
Banking crisis of 1893