An Important Lesson About Banking From Bank of Americas Founder, A. P. Giannini

By John MaxfieldFool.com

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 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.

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As Gary Hector explained in Breaking the Bank:

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:

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.

The article An Important Lesson About Banking From Bank of Americas Founder, A. P. Giannini originally appeared on Fool.com.

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