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Guaranty Fund
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

By amendment to the New York State Banking Law in 1938, the aggregate of the guaranty fund and expense fund of a savings bank in New York State shall constitute the surplus fund.  Such fund may be created or increased by contributions made by the incorporators, by transfers from undivided profits, or by transfers from earnings.  the surplus fund up to 10% of the amount due depositors shall not be available for the payment of dividends or to pay expenses, except that the part of the fund in excess of 5% of the amount due depositors shall be available without approval of the superintendent of banks for the purpose of absorbing losses.

The incorporators of a savings bank in New York shall not transact business until they shall have deposited to the credit of the savings bank in cash as an initial surplus fund at least $10,000, and, if the superintendent of banks shall so require, shall have entered into an agreement or undertaking with the superintendent to make such further contributions in cash to the surplus fund as in the opinion of the superintendent may be necessary to maintain the savings bank in safe condition, and shall have filed with the superintendent a surety bond securing such agreement or undertaking.

The surplus fund up to 10% of the amount due depositors shall be built up periodically from current earnings.  If at the close of any accounting period, the surplus fund of any savings bank in New York State is less than 10% of the amount due depositors, one-tenth of the net earnings for such period shall be credited to the surplus fund, or so much less than one-tenth as will make the surplus fund equal to 10% of the amount due to depositors.

Decline in Net Worth Ratio of Savings Banks.

As of the early 1980s, reflecting the impact of higher interest rates prevailing in the money market upon market values of lower-rate mortgages and bonds in their portfolios, and operating losses caused by shift in deposits from passbook savings accounts to the higher yielding savings instruments offered by savings banks to depositors (such as six-month money market certificates geared to the higher rates paid by the U.S. Treasury on its six-month bills), the ratio of net worth to deposits of many savings banks (and other thrift institutions), including the giant savings banks in New York City, declined below 10%, and in some cases below 5%.  The New York State Banking Law provides that except with the permission of the superintendent of banks, no dividends (interest) shall be paid on deposits when the ratio of net worth to deposits is less than 5%. As of 1981, such permission had been granted in every case.

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