19370312_Minutes.pdf

391

A meeting of the Board of Governors of the Federal Reserve Sys-

teiTl was held in Tashington on Friday, March 12, 1937, at 11:30 a. m,

PRESENT: Mr. Eccles, ChairmanMr. Ransom, Vice ChairmanMr. Szymczak

Mr. Bethea, Assistant SecretaryMr. Carpenter, Assistant SecretaryMr. Clayton, Assistant to the Chairman

Consideration was given to each of the matters hereinafter re-

to and the action stated with respect thereto was taken by theBOard:

Telegrams to Messrs. Kimball and Clark, Secretaries of the Fed-

elial Reserve Banks of New York end Atlanta, respectively, stating that

ti/e%ard approves the establishment without change by the New "fork bank

"Terch 11, 1937, and by the Atlanta bank today, of the rates of dis-

e°1111t and purchase in their existing schedules.

Approved unanimously.

Letter to the board of directors of the "First Trust & Savings;11411c

Riverdale", Riverdale, Illinois, stating that subject to the

1--s of membership numbered 1 to 3 contained in the Board's Regu-

illtion nand the following special conditions, the Board approves the

aPPlication for membership in the Federal Reserve System and for

113131'°Priate amount of stock in the Federal Reserve Bank of Chicago:

115.

Such bank shall make adequate provision for deprecia-tion in its furniture and fixtures.

Prior to admission to membership, such bank, if it hasnot already done so, shall charge off or othervAseeliminate estimated losses of 65O, as shown in thereport of examination of such bank as of February 8,

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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"6.

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"1937, made by an examiner for the Federal ReserveBank of Chicago.

Such bank shall stamp, as soon as practicable, in legi-ble form on each certificate for stock of the bankoutstanding, and, so long as the legend referred to be-low is applicable, shall stamp in legible form on eachcertificate issued upon transfer or in lieu of the cer-tificates now outstanding, a legend reading substantiallyas follows:

'Before any dividend or distribution of any kindor character is made to stockholders as such, theoutstanding Deferred Certificates issued by thebank to certain stockholders who made advances in1933, pursuant to agreements, copies of which are onfile with the First Trust & Savings Bank of River-dale, must be paid.*

(In the event that shareholders of the bank failor refuse to surrender their stock certificatesfor the purpose of enabling the bank to place there-on the legend referred to in the foregoing condi-tion numbered 6, this condition will be consideredas having been complied with by the inclusion ineach published statement of condition of the bankof appropriate information showing the relationof the rights of the holders of the outstandingDeferred Certificates to the rights of the stock-holders.)"

Approved unanimously, together witha letter to Mr. Schaller, President ofthe Federal Reserve Bank of Chicago, read-ing as follows:

"The Board of Governors of the Federal Reserve System ap-,1Z"es the application of the 'First Trust & Savings Bank ofirerdale*, Riverdale, Illinois, for membership in the Federali eserve System, subject to the conditions prescribed in thebnclosed letter which you are requested to forward to the1°11rd of directors of the institution. Two copies of suchjuter are also inclosed, one of which is for your files and

4e other of which you are requested to forward to the AuditorPublic Accounts for the State of Illinois for his infor-nlation.


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"On page 12B of the report the examiner includes a sched-ule which shows that certain securities are carried by thebank in excess of their call prices; the aggregate excesscarrying value is, however, relatively small. It is assumedthat, in accordance with your practice in such cases, you willcall this matter to the attention of the management with therequest that prior to membership the necessary adjustmentsbe made in the carrying value of such securities.

"It has been noted that in the past the bank has en-gaged rather extensively in the sale of real estate mortgages,and it is assumed in this connection that, if you have notalready done so, you will call the management's special at-tention to condition of membership numbered 3, under the pro-visions of which the irstitution will not be permitted to en-gage in the business of selling real estate mortgages.

"It has also been noted that your counsel has failed to.11:11 the certificate which he has executed on Form 83E. Itt8 assumed that the failure to sign such certificate was dueto inadvertence."

Letter to the board of directors of the "Union Bank & Trust

Cedar Falls, Iowa, stating that, subject to the conditions of

niernbel'Sbip numbered 1 to 6 contained in the Board's Regulation H and thetoil°

Special condition, the Board approves the bank's application

wembership in the Federal Reserve System and for the appropriate1332()11/1t of stock in the Federal Reserve Bank of Chicago:

117.Such bank shall make adequate provision for deprecia-tion in its banking house and furniture and fixtures."

Approved unanimously, together witha letter to Mr. Schaller, President ofthe Federal Reserve Bank of Chicago, read-ing as follows:

"The Board of Governors of the Federal Reserve System ap-Pro ves the application of the 'Union Bank & Trust Company',

.Ctedar Falls, Iowa, for membership in the Federal Reserve Sys-tern, subject to the conditions prescribed in the inclosed let-teor which you are requested to forward to the board of direc-rs of the institution. Two copies of such letter are also


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"inclosed, one of which is for your files and the other ofwhich you are requested to forward to the Superintendent ofBanking for the State of Iowa for his information.

"It has been noted that on page 21-c of the report ofexamination as of February 1, 1937, certain savings depositswere listed as being not in conformity with the provisionsOf RagulEtion D and Q. Such list, however, did not includethe savings deposit of Cedar Falls Township listed on page.1.1:1 of the report which also would appear not to be a savingsuePosit as defined in the Board's regulation. It is assumedthat the bank's attention will be called to the provisionsO f the Board's regulations with respect to the proper classi-fication of deposits."

Letter to Mr. tood, Vice President of the Federal Reserve Bank

°r St. Louis, readinc as follows:

"Receipt is acknowledged of your letter of February 6,1937$ and inclosures, regarding 'The Louisville Trust Com-PanY', Louisville, Kentucky, and it is noted that you regardbilis bank as a major problem.4. "In accordance with your suggestion, both the Reconstruc-

Finance Corporation and the Federal Deposit InsuranceC°rPoration have been advised of the situation and the report2f examination has been made available to both corporations4.0r the purpose of reviewing the condition disclosed therein.

"It has been noted that you have written the board of'lrectors of the bank regarding the criticized policies andPractices of the management and the matters subject to criti-n s-rr.1 as shown in the report of examination, and have requested

i'vice as to the steps to be taken to correct such matters.has been noted also that you have arranged for a conferencewith the Banking Commissioner of Kentucky to discuss the

Problem presented by this bank."It will be appreciated if you will keep the Board ad-

velsed of the developments in this situation. Following your211ference with the Commissioner of Banking, please forward

recommendation as to what action, if any, should be;ken to bring about a correction in the policies of the"et"Zement of the bank.

1.4 "In connection with the comments in your letter of Feb-1937, to the directors of the bank regarding the

141'1 report of condition as of March 4, 1936, it will be ap-e?lated if you will advise whether there has been any vi -

of law which has been or should be brought to the at-ention of the United States District Attorney."



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Letter to to Mr. Sargent, Vice President of the Federal Reserve

?'!trik of San Francisco, reading as follows:

"This refers to the information regarding the trust ac-tivities of Carbon Emery Dank, Price, Utah, set forth onPage 18-1 of the report of examination of such bank made asOf October 19, 1936.

"It has appeared from previous reports of examinationsthat, by direction of the Utah State Industrial Commission,there have been deposited with the bank certain funds whichrepresent death compensation of deceased miners and are re-ceived and disbursed for the benefit of their dependents.While the exact nature of such accounts is not entirelyClear, it appears that the bank exercises limited, if any,f!-duciEry powers in connection therewith and hence no ques-tion has been raised concerning them. However, it now ap-pears that, in addition to such accounts, the bank has ac-cepted one guardianship, but your examiner was advised thathe bank has no intention of further extending its trust ac-tivities and that no new business is being solicited., "As you know, the bank was admitted to membership in

Federal Reserve System in 1918 .subject to the followirircondition of membership:'4. That except with the approval of the Federal

Reserve Board there shall be no change in thegeneral character of your assets or broadeningin the functions now exercised by you, such aswill tend to affect materially the standard nowmaintained and required as a condition of mem-bership.'

.Perently the bank was not exercising trust powers at thetilf-e of its admission to membership. In the circumstances,h"e Board will raise no objection to the bank continuing to,!ndle the guardianship account now held by it nor accountsthe kind now held for the State Industrial Commission, butit should desire to exercise trust powers in other instancesn should first obtain the permission of the Board. Pleaseise the bank accordingly."


Letter to the First of Boston International Corporation, Boston,ttel

Illsetts, reading as follows:

tb "It has been observed from the report of condition of'e First of Boston Internatiorn1Corporation as of December


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"31, 1936, that the Corporation was holding 382 shares of pre-ferred stock of the Gulf States Steel Company and 546 sharesOf preferred stock of the Southern Indiana Gas and ElectricCompany, which had been called for retirement. The agreemententered into by the Corporation with the Board of Governorsof the Federal Reserve System on May 11, 1935, does not pre-scribe the type of securities in which the Corporation mayinvest, and the Board of Governors has not undertaken to pre-scribe restrictions with respect thereto in accordance withthe provisions of paragraph I (a) of the agreement. It feels,h°wever, that, since the Corporation is wholly owned by theFirst National Bank of Boston, which is not permitted by lawto invest in corporate stocks except in certain limited?lasses which do not include stocks of the type mentioned,he Corporation should refrain from making investments incorporate stocks other than such stocks as may be incidentalto its foreign banking operations.

"It has been noted also that the required reserves againstdeposits have been computed at 19i per cent of demand depositsand 4L-- per cent of time deposits, the amount of reserves re-

to be carried at the present time by member banks.-ocated in a central reserve city. Paragraph 1 (c) of the"igreement entered into by your corporation with the Board ofnernors, however, provides that the reserve carried against

Zrosits received in the United States shall be not lessbetaa 13 per cent of all deposits, no distinction being madee, ween time and demand deposits. It has been noted, how-

that the reserves reported were in excess of the requirederves computed on that basis."

)1.1c

reading as follows:


Letter to the French American Bankinc Corporation, New York, New

cor,oretion as of December 31, 1936, that required reserves

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egainst demand deposits received in the United States had beenlarPuted on the basis of 13%, and that no time deposits wereGold' Under the terms of your agreement with the Board oft vernors of the Federal Reserve System entered into pursuant4.section 25 of the Federal Reserve Act, you are required tozeintain against deposits received in the United States a re-her r" in the amount required by law against deposits of mem-kl101 banks located in central reserve cities; and, as youoti IA) member banks in central reserve cities were required

December 31, 1936, to maintain a reserve of 19% against

"It has been noted from the report of condition of your


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"demand deposits and .14 against time deposits."The Board of Governors would be willing, if you should

SO desire, to modify the terms of the agreement under whichYOU are operating, pursuant to the provisions of section 25Of the Federal Reserve Act, so as to provide that you maintaina reserve of 13% against all deposits received in the UnitedStates, both demand and time, the amount required, under theProvisions of the Board's Regulation K, of foreign bankingcorporations organized under section 25 (a) of the FederalReserve Act. It is observed that the reserves which you hadon December 31, 1936, were more than sufficient to meet theincreased requirements applicable to member banks in central!eserve cities. Unless and until the agreement is modified,

licwever, the required reserves should be computed on the basis0f the prevailing requirements for member banks in central re-serve cities in accordance with the terms of the presentagreement.

"Your views with respect to this matter will be appre-ciated."

Approved unanimously, together witha similar letter to the InternationalBanking Corporation, New York, New York.

Letter to Mr. Schaller, President of the Federal Reserve Bank of

reading as follows:

"This refers to your letter of February 25, 1937 pre-the question whether deposits received by a member

„e'llk as collateral to loans of United States Government se-'Ilrities constitute deposits against which reserves are re-

to, be carried with the Federal Reserve bank of the'4 strict.

"It is understood that the member bank lends UnitedStatese Government securities to certain of its customers whoje dealers in securities and as collateral for such loans?ePts deposits from the customers. The agreement under;41ch the loans of United States Government securities areede contains, among others, the following provisions:

'To secure re-delivery as outlined in the pre-ceding paragraph, and to secure performance and pay-ment by you of any other of your obligations to us,You have deposited with us t 14 cash and the following securities:

'Upon failure to make re-delivery as required


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"'above, we shall be entitled, at our option, to re-tain said cash and securities deposited by you as ourabsolute property in lieu of the securities loaned toyou,

"You state that the member bank does not consider de-Posits made under an agreement of this kind as constitutingR Part of its deposit liability subject to reserve because ofthe view that so long as its records indicate that these de-Posits are segregated for this particular purpose, the fundsshould be considered as collateral and not as deposits sub-ject to reserve. It is understood from your letter, however,that the funds on deposit are mingled with the bank's othereneral assets.

"In a ruling published at page 572 of the Federal Re-serve Bulletin for 1922, the Board took the position that alll'Inds received by a bank in the course of its commercial orfiduciary business must be considered as deposits againstWhich reserves are required to be carried, unless such fundsare trust funds and are actually segregated from the otherassets of the bank. Since the date of the above ruling, thePrinciple stated therein has been applied on a number of oc-casions and was recently applied in a ruling published atPage 113 of the Federal Reserve Bulletin for February, 1937.

. "It appears that the deposits in question create an.L'Fdinary debtor-creditor relationship between the bank and_uf,le customer and that the funds on deposit under the arrange-:nt referred to above are not trust funds and are not actual-

secregated from the other assets of the bank. Accordingly,Is the view of the Board that the provisions of sectionof the Federal Reserve Act require that reserves be carried'Igainst these deposits."


Letter to Mr. Dillistin, Assistant Vice President of the Federal11"az"ve

Bank of New York, reading as follows:

inel "This refers to your letter of February 13, 1937, and,„ -Losures, with regard to certain loans made on the securitystock or bond collateral by The Fifth Avenue Bank of New0°Jk, New York, New York, which the examiner, in the reportor examination as of September 26, 1936, states are in excesst, the 10 per cent limitation prescribed by section 11(m) of4a Federal Reserve Act. It appears that certain officersand counsel for The Fifth Avenue Bank of New York maintainat surplus, for the purposes of section 11(m), includes not


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"only the bank's stated surplus but its undivided profits andreserves for contingencies as well, in which event the loansln question would not be in excess of the 10 Per cent limita-tion; bat that it is your view that the term 'surplus', asused in section 11(m) of the Federal Reserve Act, does not in-clude undivided profits or reserves for contingencies, andthat counsel for your bank is in accord with this view.

"Careful consideration has been given to the questionraised in your letter and the Board is in agreement withYour view and that of your counsel with regard to this matter.1,-t is suggested that you advise The Fifth Avenue Bank oftalm York of the Board's position in this matter and request.11e bank to take such steps as are necessary to bring itslo_ans secured by stock or bond collateral within 10 per cent

its capital and surplus, exclusive of undivided profitsreserves for contingencies, as prescribed in section 11(m)

r the Federal Reserve Act."

St t


Letter to Mr. Wood, Vice President of the Federal Reserve Bank of

°Ills, reading as follows:

1 , "Following the Board's letter to you of December 15,,9°6 regarding the question whether section 32 of the Bank-tig Act of 1933 is applicable to the service of Mr. L. R.Yars as a director of the Commercial National Bank and as

resident of the Southern Securities Company, both of Little711 , Arkansas, Mr. ?Ayers conferred with Governor McKee andwrbers of the Board's staff for the purpose of ascertainingt at further information was necessary to enable the Boarda° decide the question, and thereafter Mr. Myers submitted,etailed information regarding the nature of the businessbransacted by his company.16 As you will remember, the Board's letter of Decembera ; 1936 referred to a statement which you had quoted fromofJ-etter of Mr. Myers to the effect that about 18 per centri the gross volume of the business of the company for thedl

Calyear ended April 1, 1936 'could be classified as "thethstribution of the securities to the public", and suggestedbe" You obtain additional information regarding this statementtneeaallse it appeared to be inconsistent with other statementsor e by Mr. Myers and therefore possibly the result of a lackat Understanding of the Provisions of section 32. The otherirs aillents referred to, which indicated that section 32 was-E14°ablY not applicable, were quoted in the Board's letter

are as follows:


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"'Although we have classified about one-half ofour business as having been handled for our own ac-count, we regard ourselves entirely as brokers. Wedeal only in securities that are available to everyother investment house and consequently must tradeon a market basis at all times. By that I mean thatwe do not handle securities of our own originationand on which we could set an arbitrary price.

* * *

'We have not, since early in 1929, engaged inthe issue, flotation, or underwriting of any securi-ties, nor have we been connected with any syndicateengaged in the promotion of any particular security.'"The additional information which has been submitted

shows that excluding transactions in which the company wasacting as broker, and transactions in which the company wasrnaking sales to other dealers, sales by the company amountedto only 10.99 per cent of the total volume during the calen-dsr year 1936, and there is nothing in the additional informa-!ion which conflicts with the above statement that the company'cies not engage in the issue, flotation or underwriting ofsecurities or partiCipate in selling or distributing syndicates.bl "Accordingly, it appears that section 32 is not applica-e 4„ 1,0 the relationships described in the first paragraph of:1.1118 letter, and it will be appreciated if you will advise Mr.Vers accordingly."

Approlred:


Thereupon the meeting adjourned.

Chairman.

Assistant Secretary.


19370312_Minutes.pdf

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