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Banking in Scotland
Chapter V - Deposits

Deposit taking which is now so important in banking was, at first, not a major feature of Scottish banking. The idea of deposit taking was not unknown in the early 18th century but the practice was carried out only spasmodically. From time to time it was the practice of the Bank of Scotland to accept deposits but no interest was paid on these and it was not unknown for the Bank to ask customers to withdraw their deposits. Expansion of business in those days was achieved by extending the note issue.

The regular acceptance of deposits by the Bank of Scotland did not become normal practice until 1731. The Royal Bank probably followed this example. Deposits were for six or twelve months and interest was paid at 3 or 4 per cent. The instrument of deposit was a treasurer's bond akin to the modern deposit receipt. It was not an account upon which customers could operate at will, nor was it very popular, for the total sums deposited remained fairly small although the minimum size of deposit was usually 100. Nevertheless a beginning had been made with this kind of business sometime before the same thing happened in England.

In the second half of the 18th century the rate at which deposit taking developed accelerated quickly. It was particularly associated with the provincial banking companies. The early balance sheets of the Ship Bank of Glasgow from 1752 show deposits on cash accounts and promissory notes. The latter were negotiable interest-bearing receipts. The former arose when cash credit holders found themselves temporarily with a surplus of cash. They were allowed to deposit this in their account and to draw on it at will. This was the forerunner of the modern current account. Interest was given on these accounts at 1 per cent below lending rate and was calculated on the daily balance. These developments were practised first in Glasgow which was the area of the country with the most rapid rate of economic development at the time. But other areas of the country were not far behind Glasgow in this. Aberdeen, Perth and Dundee all developed deposit facilities for their customers before the end of the century.

New instruments were developed. The promissory note gave way to the deposit receipt (sometimes called interest receipts). These were lump sum lodgements (not accounts) which attracted interest at the same rate as deposits on cash accounts. At first these were time deposits and banks stipulated minimum amounts but demands from customers became more vociferous and the degree of competition in banking intensified so that the requirements on minimum time and deposit were gradually reduced and eventually ended. By 1840, possibly before this, deposit receipts were available for sums as small as 2 and were repayable on demand. Deposits on cash account had never been restricted in any way.

Interest was therefore paid on all Scottish bank deposits long before this became common practice in England. It may be speculated that the reason for this development was the degree of poverty in capital-scarce Scotland. The relative poverty of Scotland compared with England made it necessary for the Scots to make the maximum use of their limited resources.

Throughout the 18th century and into the 19th the rate of interest paid on deposits was usually 1 per cent less than the lending rate. Some companies, however, notably the Thistle Bank in Glasgow, were of the opinion that this margin was inadequate and that to make a reasonable profit they required a wider margin between deposit and lending rates. The cashier of the Thistle Bank in the 1790s tried to get agreement amongst the banks but failed. He realised of course that he could not take unilateral action and risk the loss of deposits. As an alternative he suggested charging a commission on cash accounts, for there were no charges other than interest, but this too met with a negative response from the other banks. Yet the issues raised were to be raised frequently in the years to come. There is good evidence to suggest that Scottish banks were less profitable than their English counterparts as a result of paying interest on deposits.

In the slump of the post Napoleonic War years banks found it difficult to make effective use of deposits and so lowered the rate allowed thereby widening the margin between deposit and lending rates to 2 per cent. In most cases the rates were set by the Edinburgh bankers and the provincial companies had to follow suit.

Yet the great changes which took place in Scottish banking in the 1830s and 1840s, and which are described more fully below, were such as to increase the degree of competition and thus to put further pressure on profits. The Bank of Scotland, for one, turned its mind to how profitability might be restored to the banks. One suggestion was to have agreements amongst the banks on rates of interest but this was not easily achieved as the Glasgow banks felt these competitive pressures more severely and were therefore inclined to offer higher deposit rates than their Edinburgh counterparts. This led the banks to try to agree a common set of charges and interest rates which was eventually successful but in the 1840s it seemed at times that agreement would never be reached for when most banks agreed to widen interest margins or to make a charge for the use of cash accounts it always seemed that at least one bank wanted to follow a different course. Nevertheless agreement was gradually reached and by the 1860s the banks were all following broadly similar interest and charge structures. Charges for accounts however were short lived.

The result of this was to restore a modest degree of profitability to the banking system but it led inevitably to allegations of monopoly practices being levied against the banks. Nevertheless charges were still lower than they were in England and deposit rates were often higher. Interest on cash credits, soon to be replaced by current accounts, were phased out by 1892 as was the English practice but Scottish banks continue to pay interest on a higher proportion of their deposits than do their southern neighbours.

Throughout the 19th century the banks continued to support the Savings Bank movement. Generally banks were prepared to accept, in bulk, the deposits which had been gathered by all kinds of savings banks and to pay interest on them at 1 per cent over their normal deposit rate, i.e., there was no direct profit for the banks in this and it was done for largely philanthropic reasons. Banks were keen to encourage thrift and the banking habit amongst the working classes of Victorian Scotland. Some benefit to the banking system was achieved by the success of this activity.

By the turn of the 20th century, however, it had become increasingly necessary for the note issuing banks to attract deposits directly from a wider range of people. Until then deposits had been secured very largely from business customers. The need to expand the deposit base became critical in the 1920s when the difficult times experienced by trade and industry caused a contraction in the banks deposits and this was exacerbated by an acceleration of a long term trend which had resulted in an increasing number of Scottish businesses being taken over and run by English companies. Surplus funds from these concerns were now banked in England.

Faced with these challenges the Scottish banks agreed to set up Savings Departments and to offer deposit accounts in 1928. The name was later changed to savings accounts. Customers operated on these accounts at will and received a passbook in which their transactions were recorded. The purpose of these accounts was to attract the deposits of small savers and so enlarge the deposit base. The banks therefore entered into competition with the Savings Banks and with the Municipal Savings Banks which were increasingly being set up in the 1920s. The name of these accounts was progressively changed to deposit accounts from the early 1960s. By that time this type of account had proved to be very popular and deposits on these accounts exceeded balances on the traditional deposit receipts.

By the 1960s the banks had entered a very highly competitive era. By that time also deposits had long overtaken note issues in importance and the strength of banks was more often measured and compared by the size of their deposits than by their paid-up capital or number of branches.

Yet deposit gathering was not easy for the banks for other deposit taking institutions were able to offer inducements which the banks could not. For example National Savings and the Trustee Savings Banks were able to offer a certain level of tax free interest (since phased out in the case of the Trustee Savings Banks) and Building Societies paid their interest net of tax but the tax they paid was at a composite rate, lower than base tax rate so that there was an advantage for the depositor. The banks had none of these advantages and consequently found it much more difficult to attract deposits. The situation was made doubly difficult in the 1960s and 1970s with the substantial proliferation of building society branches especially as these branches remained open for longer hours than the banks. The result of this is that Building Society deposits in the U.K. are now larger than bank deposits.

The banks tried to counter this by seeking to extend the banking habit to all salaried employees and persuaded many employers to pay salaries straight into bank accounts. This process, which is still continuing, greatly extended the number of personal accounts in the banks not just for deposit but for all services. In any case this development had a lot to recommend it on grounds of increased efficiency for all concerned but was made even more attractive for those who chose to have current accounts by the very low charges levied on these accounts and the great convenience of having one. In fact a large proportion of current account holders operate their accounts in such a way that there are no charges. Charges for current accounts had been introduced only in 1952 long after these had become commonplace in England. Yet right from the outset a system of offsetting these charges, gauged by the sum at credit in the account, had been instituted and charges were generally very low.

The particular importance of deposits for the banks has been that healthy growth in deposits has, almost always, been necessary for growth in advances. In order to meet increased demands for credit banks have been forced to expand their deposit base so that deposits now far exceed capital and note issues.

Another manifestation of this same trend was the shift in the balance between interest bearing and non-interest bearing deposits. In 1971 of all sterling deposits only 56.4 per cent attracted interest but by 1976 this figure had risen to 69.2 per cent. Also notable is the growth of foreign currency deposits. Usually these have been acquired from foreign and other British banks and are used to finance lending in these currencies. Deposits in foreign currencies grew from 20.6m in 1971 to 621.7m in 1976.

In the 1970s the banks, partly to meet competition from merchant banks and other financial institutions, and partly to increase their deposit base, became involved in wholesale banking, i.e., they sought large deposits from businesses, local authorities and anyone who had large deposits to offer for any period of time. Many of the deposits thus attracted were time deposits and were given higher than normal rates of interest. The banks also began to issue negotiable certificates of deposit. The bulk of the banks' deposits, however, remained demand deposits on current accounts, deposit accounts and deposit receipts. Only the T.S.B. has so far established a regular savings plan offering higher than normal rates of interest.

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