Graphic: An Encyclopaedia of New Zealand 1966.

DISASTERS AND MISHAPS – FINANCIAL

Colonial Bank

The Colonial Bank was established in 1874 with its head office in Dunedin. When the Bank of Otago was taken over by the National Bank the promoters, mostly from Dunedin, set out to provide a New Zealand-owned bank which would in addition attack the virtual monopoly of banking that had been created in the North Island. The bank had an authorised capital of £2 million divided into 400,000 £5 shares, of which half were issued and paid up to £2 giving an actual capital of £400,000. The Bank had 30 branches, including one in London, and 10 agencies, and at one time had deposits of £2 million and advances of £1.75 million. The Colonial Bank was established too late to benefit from the boom of the early 70s, but it shared in the land boom of 1875–79 when bank advances financed the rise in the price of land. The failure of the City of Glasgow Bank in October 1878, partly caused by advances on the security of land in New Zealand and Queensland, drew attention to the dangers of such advances. The Glasgow failure brought some sense of reality to the economy, but did not prevent further advances on the same security. Along with the other banks, the Colonial Bank survived the eighties. It was never in a very strong position, but by various means during the 21 years of its existence it managed to pay an average annual dividend of 7 per cent. The slump reached its bottom in 1887 and 1888 and in the banking world caused heavy losses, or at the very least a depreciation in the value of the securities on which money had been advanced. The Bank of New Zealand suffered badly and in 1889 amalgamation was discussed between George Buckley, president of the Bank of New Zealand, and Hon. George McLean, chairman of the Colonial Bank. The latter, however, wanted a new institution shorn of the accumulation of assets which the Bank of New Zealand had obtained from its foreclosures.

In the following years the Colonial Bank tried to obtain a share of Government business, which did not improve matters. When the Government came to the assistance of the Bank of New Zealand in 1894 McLean favoured liquidation, leaving the Colonial Bank to take up its good business; but the Government believed that in this case more than one bank would close its doors. After the passing of the Bank of New Zealand Share Guarantee Act an agreement to amalgamate was drawn up and sent to the Colonial Treasurer, who amended several clauses. Just before the end of the session, however, a clause was added to a Banking Act to prevent amalgamation of the Bank of New Zealand with any other bank without Parliament's consent.

The Colonial Bank now had difficulties of its own to face. The half-yearly report of February 1895 said the bank was in a very strong position, but deposits had fallen by half a million during the Australian crisis, advances had had to be restricted, and earnings fell. In May it became clear that the bank was in trouble. Shareholders became anxious about the possibility of a call and the £2 shares dropped to less than £1 and then to 13s. 6d. The bank's balance sheet was presented to shareholders in September without reference to a dividend or the usual reference to bad debts. In the ensuing negotiations the Colonial Bank suggested that, in return for the whole business, the Bank of New Zealand should pay £300,000 in cash; further, that a suspense account of £100,000 against contingencies would be set up. Shortly after the negotiations began, however, a serious shortage was revealed in the account of the Ward Farmers' Association, the business of Hon. J. G. Ward the Colonial Treasurer, which owed the Colonial Bank about £87,000. This put the Bank of New Zealand in a very strong position and it was finally agreed that only the sound business of the Colonial Bank would be purchased. Officers of the Bank of New Zealand considered and classed the advances of the Colonial Bank amounting to £1,731,549. The first group, called “A”, were those which were fully secured and amounted to £926,197. The second were the “B” or “doubtful” accounts. The Bank of New Zealand was to manage, realise, and adjust these accounts on behalf of the liquidators of the Colonial Bank for two years, during which time it could, as it thought fit, take over such accounts. The “B” accounts amounted to £604,695 and the Colonial Bank provided a reserve of £327,205 for them. The Bank of New Zealand took them all over before the end of the two years, paying the liquidators £4,000 from the reserve. The “C” list of £89,382 was mainly the Ward Farmers' accounts and the Bank of New Zealand had three months' grace in which to make its decision. It did not take them over, though the smaller accounts seem to have been paid in cash. The “D” accounts, amounting to £102,274, were bad and doubtful debts and properties held against closed accounts. The liquidators are stated to have realised about 10s. in the pound on the whole of the list.

In the end the total good assets, including goodwill, buildings, and the accounts to be purchased, amounted to £2,643,190, and the liabilities, £2,509,284. The difference, £133,906, was to be paid in cash. The agreement was laid before Parliament during October and approved a week later after a debate on political lines. The Colonial Bank closed its doors on 18 November 1895 and that night handed its books and cash over to the Bank of New Zealand, which provided service without interruption. The liquidation of the Colonial Bank assets not taken over was long and costly as they had to be dealt with through the Courts. The shareholders felt that they could have been handled more advantageously, but times were not good, and the losses were great.

Though a good deal of publicity was given to the investigation of some of the accounts, the liquidation of the Bank generally was wrapped in some mystery. One statement was made in 1897; thereafter, no report was made until 1905 when final dissolution was sought. Shareholders received a total of 11s. 1¾. per share, and in all they received £111,454 for the 484,980 shown as the value of their interest in the bank on 31 August 1895, plus £75,000 paid for the goodwill.

The Ward Farmers' Association went into liquidation, the Hon. J. G. Ward being declared bankrupt in July 1897. He was in a most unhappy position and the Rt. Hon R. J. Seddon became responsible for overseeing the negotiations. The Bank of New Zealand gained from the new business the amalgamation brought in and from the ending of competition. There was undoubtedly mismanagement in the Colonial Bank, but it was not alone in that respect. Though the shareholders lost heavily, if the amalgamation had not gone through, the bank would probably have been forced under. The bank's troubles led in part to the suicide of Hon. W. J. M. Larnach in Parliament Buildings on 12 October 1898. Larnach, in addition to other financial troubles, had lost heavily through the Colonial Bank. He had been one of the promoters and on the board for most of the 21 years. Such was his faith in it that he had sold other shares in order to buy more of the bank's when the price had fallen.



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This information was published in 1966 in An Encyclopaedia of New Zealand, edited by A. H. McLintock. It has not been corrected and will not be updated.

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