The Bank of San Carlos

the broken principle of prudence after the departure in 1790 of Cabarrus and his management team

Abstract

The Bank of San Carlos, was founded in 1782, and was set up to achieve three different objectives which have been considered strange to the researchers: the management of special kind of Public Debt called Vales Reales, the supply of military troops, and usual banking operations called Real Giro. Nevertheless, it existed not only for economical reasons for integrations of these activities in the institution.

The profits of the Bank exceeded all predictions in the first years when it was operative. Nevertheless, a series of troubled operations would determine a crisis of confidence in the management developed by the administrators. Previously, due to the lack of elements of effective control in the entity, the Bank established in 1788 a Commission of Shareholders, which was in charge of checking both the accounts and the moral of the directors. Its conclusions, one year later, would confirm the full integrity of the stockholder`s equity and the correct distributions of dividends. This Commission proposed to create a new group, called commissioners, who, like auditors, would annually verify the accounting statements.

In fact, one of the firsts actions of the commissioners, was to raise objections to certain items with Royal Treasury, motivated by the business of the supply of troops. The evaluation of the Bank situation made at this time showed a lack of stockholder`s equity, it was suggested to dedicate the profits of 1789 to cover it. After powerful reasons were given, the shareholders, agreed about not receiving any dividend, in order to dedicate it to the reconstitution of the shareholder`s capital, keeping the principle of prudence.

With the new directors in 1790, although the lack of stockholders' equity evaluation was increased, the principle of prudence was broken. The reasons that justified this decision made the previous year, were ignored and a dividend of 5 % was paid. This fact was supported by some expectations that already existed in the previous year which didn`t allow to reduce the uncertainty.

Three years later the King indemnified the Bank to cover such an imbalance. During this time the institution continued distributing dividends, persevering the way of having broken the principle of prudence previously established and in opposition to the good reputation of the Bank.