Please ensure Javascript is enabled for purposes of website accessibility

An Important Lesson About Banking From Bank of America’s Founder, A. P. Giannini

By John Maxfield - Sep 18, 2015 at 12:48PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The importance of liquidity.

A.P. Giannini knew a thing or two about banking. He founded Bank of Italy in downtown San Francisco in 1904. It later changed its name to Bank of America (BAC 2.32%) and went on to survive the massive earthquake and fires that reduced San Francisco to rubble in 1906, the infamous Panic of 1907, and the Great Depression of the 1930s.

One thing Giannini was particularly good at was stopping bank runs, which is when depositors withdraw their funds en masse out of fear that a bank is headed for insolvency. In the Panic of 1907, for instance, while larger and more established banks refused to allow their customers to withdraw gold, which served as currency at the time, Bank of America (though it was still known as Bank of Italy) had stockpiled an excess supply of liquidity in preparation for this very thing.

As Gary Hector explained in Breaking the Bank:

The Bank of Italy was an exception. It paid all its claims in either gold or legal currency. When nervous depositors at other banks found this out, they flocked into the Bank of Italy, bringing their gold and strengthening the institution. At the end of the year, the Bank of Italy showed an increase of $300,000 in deposits to more than $1.6 million.

The importance of this can't be overstated. In 1984, the seventh largest bank in the United States, Continental Illinois, was seized by federal regulators after large institutional investors refused to roll over the short-term financing that kept the Chicago-based bank alive. A quarter of a century later, these same forces led to the downfall of Washington Mutual, Bear Stearns, and Lehman Brothers, among others, in the financial crisis of 2008.

The lesson in all of this is that small depositors provide a more reliable source of funding for banks compared to big institutions. As Giannini himself noted:

The little fellow is the best customer that a bank can have, because he is with you. He starts in with you and stays to the end. Whereas the big fellow is only with you so long as he can get something out of you; and when he cannot, he is not for you anymore.

This quote came to my mind when I read through current Bank of America CEO Brian Moynihan's presentation at the Barclays Global Financial Services Conference on Thursday. As you can see in the charts below, offered by the 55-year-old executive to illustrate the bank's success under his stewardship, the now $2.2 trillion behemoth has scaled up its excess liquidity (chart on the left) and increased its reliance on deposits relative to long-term debt provided by large institutional investors (chart on the right).

Source: Bank of America.

The purpose of the charts was to make the case that Moynihan deserves to retain his dual titles of chairman and CEO, which shareholders will decide by vote on Sept. 22. But regardless of the outcome, the point is that Bank of America is a safer investment today than it was when Moynihan took over at the beginning of 2010. A.P. Giannini would have been appalled at the conduct that got the bank into trouble over the past decade, but it seems safe to assume that he'd be equally pleased with its subsequent turnaround.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$36.67 (2.32%) $0.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
332%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.