The Pre Federation bank that ended in a disaster
The Provincial and Suburban Bank opened for business on November 26th, 1872 at 165 Smith Street in Collingwood (Melbourne, Victoria). Three years of poor results right from the outset meant that a portion of the bank's capital had to be written off not long after it was established.
Management then changed to a Mr Richard Willis, a gentleman who until that stage in his career had apparently been a cordial manufacturer. With a background such as that, it is perhaps unsurprising that it was proven later that Willis was "ignorant of even the rudiments of banking."
The Provincial and Suburban Bank began issuing banknotes in 1877, however as it had a very poor reputation in financial circles, other trading banks persistently refused to accept them.
The Provincial and Suburban Bank finally failed on May 12th, 1879 - creditors received only 8/9 in the pound, note-holders received only 2/- in the pound, whilst shareholders received nothing.
The manager and directors were prosecuted for: fraud; for preparing false balance sheets; for buying shares in the bank with its own money for the purpose of giving them a fictitious value in the market; and for keeping the bank open after it had reached a state of hopeless insolvency.
The jury found each of the men guilty, and recommended mercy on account of their inexperience. The Chief Justice agreed, and fined each of the directors £50, and the manager £250.
Much of the information that follows has been taken from pages p194-196 of Mick Vort-Ronald's excellent book "Banks of Issue In Australia", available for purchase in our online store. It is the definitive work on the privately-issued notes that circulated in the Australian economy prior to Federation.
The Provincial and Suburban Bank - Too Bad To Save
The following information has been taken from a research paper published on the RBA website "A HISTORY OF LAST-RESORT LENDING AND OTHER SUPPORT FOR TROUBLED FINANCIAL INSTITUTIONS IN AUSTRALIA", authored by Bryan Fitz-Gibbon and Marianne Gizycki.
Melbourne had become Australia's main financial centre following the Victorian gold rushes in the 1850s. In the absence of a central bank, and with the government unwilling to intervene to assist troubled banks (other than the savings banks), the trading banks began to take collective action themselves to provide limited last-resort support through their industry association.
In 1879, three (relatively small) banks sought assistance from the Associated Banks: the Provincial and Suburban Bank, the Australian and European Bank and the City of Melbourne Bank. The Provincial and Suburban Bank was deemed by it's peers to be too weak to warrant support, a decision that reflected both the Associated Bank's concern to protect their own viability (by only lending to sound institutions) and moral hazard concerns (a refusal to support banks that had been managed recklessly).
Prior to this decision being made, there was some debate within the Associated Banks concerning the public's ability to discriminate between notes issued by different banks.
One argument made was that the public did not discriminate between notes issued by sound and weak banks, and therefore other banks should honour the Provincial and Suburban's notes. The prevailing view, however, was that the Provincial and Suburban was widely known to be unsound, and therefore no support was provided. (The Australian Insurance and Banking Record reported that the closure of the Provincial and Suburban Bank caused no astonishment in banking circles, and produced no effect whatever up on the price of other bank shares.)
In the liquidation of the bank, note holders received just 10 per cent of their notes' value, depositors received a little over 40 per cent of their funds, while shareholders lost all of their capital investment (Sykes 1988).