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FEDER L RESERVE BO RD

129

WASHINGTON

T O

T H E FEDERAL RESERVE BOARD

X-6692

•September 4 , 19 30.

SUBJECT Topic

f o r

Fall Conference

-

Revision

of

Membership Condition

r e

Purchase

of

Bank Stocks#

Dear S i r :

The r ep l i e s t o t h e Board ' s l e t t e r of June

27 , 1930 , (X-6646) re la ti ve t o t h e a d v i s a b i l i t y o f

a r ev i s ion of the condition of membership regarding

t h e purchase of stock i n o ther in s t i t u t ions by State

member banks, disclose

a

considerable variance

of

opinion

on the

question

and

accordingly

th e

Board

h a s decided to r e f e r t h e matter to the Conferences

Of

Governors

and

Federal Reserve Agents which

c on-

vene on October 6 .

F o r your information there i s enclosed

copy

of a

memorandum prepared

by the

Board's

Assistant Counsel summarizing

th e

r e p l i e s

to tho

c i r cu l a r l e t t e r r e f e r r ed t o above.

Very truly yours,

E. M.

McClelland,

Assistant Secretary.

Enclosure.

TO AM,

GOVERNORS

AHD

FEDERAL RESERVE AGENTS.

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i 1.30

C O P Y X-6692-a

August 9 , 1930t

The Fed era l Reserve Board Proposed re vi si on of condit ion No. 3,

M r.

Wingfield, As si st an t Counsel. Section

IV, of

Board 's , Regulat ion

H.

Under t h e presen t p rovis ions of condition No. 3 of Section

IV of the

Board's Regulation

H, a

State member bank subject

t o

such condition

may not

purchase

any of the

stock

of

another bank

o r t r u s t company un le ss i t obtains i n each case th e permission of

t h e Fede ral Reserve Board. Recentl y th e Board considere-1 t h e a d -

v i s a b i l i t y of revising this condit ion so as to perm fc Etate member

banks subject t o i t t o purchase a l imited percentage of: the cap i ta l

s tock of other banks and trust companies without being under the

necess i ty of obtaining t h e Board's permission t o make such purchases.

This off ice was requested t o prepare a d r a f t of a rev is ion o f c o n -

d i t i o n No. 3 along this l ino. The following revision of t h i s c on-

d i t i o n was accordingly prepared and submitted to the Board:

( 3 ) Such bank o r trust company, except after

applying f o r a n d receiv ing t h e permission of the Federal

Reserve Board, shall n o t acquire more than 5 0 p e r cent o f

t h e cap i ta l s tock of any other bank o r trust company; a nd ,

except with th e Board's permission, i t s total investments

i n t h e

s tock

of

other banks

and

trust companies shall

n o t

exceed

2 0 p e r

cent

of i t s own

cap i ta l s tock

an d

surp lus ."

Before reaching a determination as to whether this revision

of condit ion No. 3 should b e adopted, however, th e Board decided to

submit i t t o t h e Governors and Federal Reserve Agents o f a l l Federal

reserve banks f o r thei r suggest ions . The Board acc ordi ngly on June 27,

1930 , addressed a letter (X-6646) t o a l l Governors a n d Federal reserve

agents and requested them to advise th e Board whether i n their opinion

a r ev i s ion o f this condition of membership Mo. 3 was advisable and as

to whether th e percentages contained i n t h e revision above quoted with

reference to the amount of stock of other banks and trust companies,

which might b e purchased by a member bank were appropriate a n d advis-

able. Replies

to the

Board 's l e t t e r have

now

been received from

a l l

of the Governors a nd Agents an d these rep l ies wi l l be summarized f o r

th e

Board's information.

I t appears that s i x o f t h e Governors and Agents a r e of the

opinion that

i t i s n o t

des i r ab le

f o r t h e

Board

a t

this time

t o

make

a ny change i n t h e condition No. 3 contained i n Sect ion IV of the Board's

Regulation

H. In

this connection,

t h e

Board' s specia l a t te n t ion

i s

ca l l ed

t o t h e

l e t t e r s rec eive d from Governor Black

of

Atlanta, Governor

Harrison

of New

York,

and Mr.

Heath

of

Chicago, which

s e t o u t i n

some

d e t a i l t h e ob ject ions t o a change i n t h e present provisions o f th is

condit ion. Theso l e t t e r s discuss th e question whether i t i s advisable

f o r t h e

Board

t o

r e t a i n

an y

condition

of

membership with reference

t o

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2 **

X-6692-a 1 %

t h e purchase of bank st oc ks . They po in t o u t , however, that group

a nd branch banking i s being investigated with a view t o poss ible

l e g i s l a t i o n on the subjec t and tha t th e Board i t se l f h a s appointed

a committee t o investigate group and branch bank ing. Under th ese

circumstances, they suggest that any change i n condit ion Uo. 3

should be d e fe r r e d u n t i l a la ter da te .

All o f the

other Governors

and

Federal reserve agents seem

to

fool that some change i n this condit ion i s de si ra bl e. Three of this

l a t t e r group bel ieve tha t i t i s advisable f o r t h e Board t o eliminate

from

i t s

Begula t ions ent i re ly

t h e

condit ion

Ho. 3 . The

others

b e -

l i e v e i t i s des i rab le f o r t h e provis ions of th is condi t ion to be

rev i sed so as to permit a member bank t o purchase limited amounts of

t h e

s tock

of

other banks

and

trust companies without obtaining

s p e -

cific permission from th e Board. Various per cen tag es with re fe ren ce

t o t h e

amount

of

stock which should

b e

purchased without

t h e

Board's

permission a r e suggested by these Governors and Federal Reserve Agents#

One Governor and two Federal Reserve Agents think that th e percentages

contained i n t h e revision above quoted a r e a p p ro p r i a t e . The great

ma jo ri ty , however, fee l that these percent ages a re t oo l i b e r a l and in

most cases suggest considerably lower percentages of varying amounts#

I n this connection t h e p a r t i c u l a r a t t e n t i o n of the Board i s ca l l ed to

t h e l e t t e r s of Governor Uorris of Philadelphia, Governor Martin of

S t . Louis, and Mr. Walsh of Dallas .

The r e p l i e s of each of the Governors a nd Federal Reserve Agents

w i l l

bo

summarized

f o r t h e

Board's information

i n

greater detail below:

SUMMARY OF REPLIES

BOSTOH-

Doputv Governor Pad doc k.- Deputy Governor Paddock be l i eves th at

condi t ion No. 3 might Well b e el iminated entirely because i t docs not

prov ide sa t i s fac to ry con t ro l of group banking. I f condit ion i s to be

retained, however,

he

suggests that

a

member bank

b e n o t

permit ted

t o

purchase more than 4 0 p e r cent of the capi ta l s tock of any other bank

or

t r u s t company wit hou t

t h e

Board's permission

a nd

tha t

t h e

l im i t

of

i t s

total investments

i n

bank stocks should

bo 40 per

cent

of i t s own

c a p i t a l and surp lus .

Mr.

Curt iss

- Mr.

Curtiss believes that

i t

would

be

des i rab le

t o

eliminate condit ion No. 3 en ti re ly because th is condit ion i s n o t e f -

f e c t i v e i n g iv ing t h e Board control over group banking. I f t he con -

d i t i o n i s t o bo retained, however, h e suggests that t h e purchase with-

ou t t he Board's permission b y a member bank of s tock of any other bank

o r trust company be l imi ted to 40 pe r cent o f t he cap i ta l of such other

bank o r trust company. I t i s n o t clear what limit with reference to

total investments i n t h e s tock of other banks and trust companies he

be l ieves i s des i rab le .

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1 33

- 3 -

X-6692—a

HEW

YORK.

Governor Harrison.- Governor Harrison suggests

t h e d e -

s i r a b i l i t y

o f

e l iminat ing ent i re ly

t h e

condit ion

o f

membership

Ho.

3. He fu rt he r sugges ts, however, that any amendment of t h i s c o n -

d i t i o n

of

membership

be

de fe r red un t i l a f t e r

th e

committee appoint-

ed by the

Board

t o

investigate group

and

chain banking

h a s

made

i t s

r ep or t. Governor Harris on appears

t o

fool that condition

o f

membership

No. 3

would

n o t b e

e f f e c t i v e

i n

controll ing group

and

chain banking an d that investment i n bank stocks b y State member

banks

i s n o t

inadvisable , unless

th e

aggregate amount

o f

such

i n -

vestments

by any one

member bank

i s

such

a s to

indica te tha t

t h e

member ba nk 's ge ne ra l inve stment pol ic y i s unsound.

Mr»

Case,-

M r.

Case

h a s

advised

th e

Board that

he

concurs

i n

Governor Harr ison 's l e t t e r .

PffTT.ATffiTT.PffTA.

Governor Morris.- Governor Morris believes that

a

revis ion

of the Board's condition of membership No. 3 i s des i rab le . He sug -

gests that

t h e

purchase

by a

member bank

o f

s tock

of any

other bank

o r

t r u s t company withou t

t h e

Board's permission

b e

l imi ted

to 20

p e r

cent

o f t h e

capital s tock

of

such other bank

o r

trust company

a nd

tha t

t h e

total amount

of

bank stock

a

member bank

may

purchase

be

l imi ted

t o 5 p e r

cent

of i t s own

cap i ta l

an d

surplus ,

o r a t t he

most

to 10 p e r

cont

of i t s own

cap i ta l

a n d

surplus .

M r.

A u s t i n . -

M r.

Austin beli eves that

a

change

i n t h e

Board's

condit ion o f membership ITo. 3 i s des i rab le . He suggests that the

purchase

b y a

member bank

of

s tock

in a ny

other bank

o r

t r u s t con>*

pany

b e

l imi ted

to 20 pe r

cent

of

such other bank's capital stock

without

t h e

Board's permission

and

also suggests that

t h e

t o t a l

i n -

vestment

b y a

member bank

i n

bank stocks

b e

l imi ted

t o 2 0 p e r

cent

of i t s own

c a p i t a l

an d

surp lus .

M r.

Austin also suggests that

i f

this condit ion

i s

revised,

i t b e s o

framed that

i t i s

appl icable

to

member banks which

are now

subjec t

t o

this condit ion

i n i t s

present

form

o r in the

form

i n

which

i t wa s

appl ied pr ior

to the

Board's

Regulations, Series

of 1928.

CLEVELAND,

Governor rancher

and Mr.

BeCamp.

-

Governor Fancher

and Mr.

DeCamp have replied

t o t h e

Board 's l e t t e r (X-6646)

i n a

jo int le t te r .

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1 3 3

— 4 — X~6692~a

They seem t o feel that i f t h e Board's condition of membership

No# 3 i s rev ised a s proposed, group "banks will be able to evade

t h e

s p i r i t

of

this condit ion

b y

reason

of the

fact that several

member "banks which a r e members of a particular group might hold

t h e permitted amount of stock i n a particular "bank and the a g-

gregate amount

so

held

by a l l

members

of the

group would consti-

tute control of the "bank# They su gg es t, however, t ha t th e to t a l

amount of bank stock which a member bank might purchase should

n o t without t h e Board's permission exceed 20 or 25 p er cent of

i t s own cap i t a l and su rp lu s• They seem t o f ee l t ha t a rev is ion

of the condit ion so as to permit a member bank without th e Board's

speci f ic permiss ion t o purchase up to 50 p er cent o f the cap i ta l

of any one bank o r trust company i s n o t inadvisable#

RICHMOND.

Governor Seay and Mr. Hoxton - Governor Seay and Mr. Hoxton

have also made a jo in t rep ly t o t h e Board's l e t t e r (X-6646).

They suggest that

t h e

rev is ion

o f the

Board's condition

of

member-

ship No. 3 contained i n t h i s l e t t e r i s extremely l i be ra l a n d goes

much further than could be rea son abl y expe cted. They sugg est tha t

t h e

amount

of

s tock

of any

bank which

a

member bank

may

purchase

without t h e Board's permission b e placed a t 2 5 p e r cent of the

cap i t a l of such other bank o r t r u s t company# They f u r t h e r s u g -

gest that th e total amount of bank stock which a member bg&k may

purchase without th e Board's permission be f i x ed a t 2 0 p e r cent of

th e

cap i t a l

a nd

surplus

of the

member bank#

ATLANTA.

Governor Black.- Governor Black feels that there should

be no change i n t h e present provisions of the Board's condition

of

membership

Ho# 3 . He

fe el s that th is c ondition should

not be

l iberal ized because (1 ) national banks a r e n o t permit ted t o p u r -

chase bank stock, (2) the Board might be accused of f ix ing i n i t s

regulat ion th e wrong percentage, since what would be a proper l i m -

i t a t i o n , in one case might be obviously improper i n another , and

(3.) that a change i n this condit ion, while legislat ion on the sug-

j e c t

of

group banking

i s

being considered, might

bo

p o l i t i c a l l y

construed ei ther as an a id or an obstacle t o group, chain o r branch

banking#

Mr. Hew to n . - Mr# Newton feels that no change in the Board's

condit ion of membership No# 3 i s desirable because a part icular bank

might not be j u s t i f i e d i n purchasing any number of shares of the stock

of another bank and each case should stand upon i t s own merits#

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X-6692~a

CHICAGO.

Governor McDougal. - Governor McDoagal suggests that t he

Board.

1

s

condit ion

of

membership

Mo, 3 be

e l iminated en t i re ly

from th e Board's conditions of membership. I t appears that

he

does

n o t

fee l tha t

th e

Board should,

by

r e t a in in g th i s

c o n -

di t ion , a t tempt e i ther t o r e s t r a i n o r encourage group banking#

Mr*

Heath , -

Mr,

Heath suggests that

t h e

Board's condi-

t io n of membership No, 3 should remain unchanged or should h e

eliminated from th e Board's conditions of membership entirely*

He p o in t s o u t th a t i f a member bank i s permitted without the

Board 's permission

t o

purchase

up to 50 p er

cent

o f t he c a p -

i t a l of any one hank and purchase an aggregate amount of bank

stock up t o 20 p e r cent of i t s ovm cap i t a l a n d su rp lu s , a

la rg e member bank could a c t ua l l y contr ol

a

considerable number

Of smaller banks and thus become a holding company f o r a group

banking system

of

considerable size,

Mr,

Heath fe el s , the re-

fo re , tha t t h e proposed revision of condition of membership

No. 3 with th e percentages contained i n th is p rov is ion , a s

s e t o u t i n t h e

Boa rd' s l e t t e r (X«»6646) would co ns t it ut e

v i r -

tual approval of the p r in c ip le of group banking, Mr. Heath

fu rt he r suggests that t h e Board h a s appointed a committee to

i n v es t ig a te a l l phases of group, chain and branch banking and

t h a t

i t

would

n o t b e

advisable

t o

l i b e r a l i z e

th e

provisions

of condit ion of membership Ho, 3 in advance of the report o f

this committee, which

may

possibly make

a n

adverse report

on

t h e p r i n c i p l e o f group banking,

T

LOUIS.

Governor Martin.- Governor Martin suggests that

condit ion of membership Uo, 3 be rev ised so as to l imit

t h e purchase b y a member bank without th e Board's permis-

sion of s tock i n a ny other bank o r trust company to 20 per

cent

of

c a p i t a l

of

such other bank

o r

trust company

and

t o l i m i t t h e total investments i n bank stock b y a member

bank, t o 2 0 p e r cent of i t s own cap ita l s tock and surplus

#

Mr,

Wood.

— Mr,

Wood su gg es ts tha t

t h e

condition

of

membership

Ho, 3 be

revised

so as to

l im i t

th e

r i g h t

of a

memoer bank to purchase stock ei ther d irect ly o r in d i rec t ly

through an a f f i l i a t e d c o r p o r a t i o n or otherwise in any other

bank o r trust company, without th e Board's permission, to 20

p e r

cent

of the

cap i t a l

of

such other bank

o r

trust company*

M r, food does n o t suggest a n y l i m i t a t i o n on t he aggregate

amount of bank stock which a member bank may purchase with-

ou t t he Board's permission*

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6

X-6692-a

MINNEAPOLIS.

Governor Geery.

-

Governor Geery feels that

a

revi s ion

of the

Board's condit ion

of

membership

No. 3 is

des i rable

and he

suggests

tha t

a

member bank should

be

authorized

t o

purchase without

the

Board's permission

n o t

more than

2 5 p e r

cent

of the

stock

of any

other bank

o r

trust company

and to

inves t

n o t

more than

20 pe r

cent

of i t s own

cap i t a l

and

surplus

i n t h e

stocks

o f a l l

other

•

banks and trust companies,

Mr.

Mi tche l l .

- Mr.

Mitchell states that

h e

thinks

t h e

amount

of

bank stock that

a

member bank should

b e

permit ted

t o

hold should

b e

l imi ted

t o t h e

smallest possible amount, since

a

national bank

i s

n o t

permit ted

t o

inves t

in any

bank stock,

he

fee l s tha t

a

State

bank

o r

trust company should

no t bo

permit ted

to do s o . I t

appears,

therefore , tha t M r. Mitchell i s of the opinion that no change should

be

made

i n t h e

present provis ions

of the

Board's condit ion

of

member-

ship

No. 3,

KANSAS CITY.

Governor Bailey.

-

Governor Bailey f ee ls th at

i t i s

desi rable

t o

l i b e r a l i z e

t h e

present provis ions

o f t h e

Board's condit ion

of

membership

No. 3 . He

sugges ts th at

a

member bank

be

authorized

t o

purchase n o t more than 2 5 p e r cent of the capi tal s tock of any other

bank o r t r u s t company without th e Board's permission and that such

a member bank be authorized t o make aggregate investments i n t he

s tocks

o f a l l

banks

and

trust companies

n o t i n

excess

o f 25 p e r

cent

of i t s own

c a p i t a l

and

surplus .

Mr.

McClure.

- Mr.

McClure feels that

a

l i b e r a l i z a t i o n

of the

present provis ions of the Board's condition of membership No. 3 is

advisable and he feels that t h e percentages of 50 p er cent and 20

p e r

cent , respect ively, contained

i n t he

revised condit ion

s e t ou t

i n t h e

Board's letter (X-6646)

a r e

reasonable l imitat ions

on the

amount

of

s tock

of any one

bank which

may be

purchased

by a

member

bank

and on the

aggregate amount

of

bank stock which

may be

purchased

by a

member bank.

DALLAS.

Governor Talley.

-

Governor Talley feels that

a

revi s i

on of

t h e

Board

8

s condit ion

of

membership

No, 3 is

des i rable ,

b u t

suggests

t ha t

a

member bank should

n o t b e

permit ted

to

purchase more than

20

p e r

cent

of the

capi tal s tock

of any one

bank

o r

trust company

e x -

cept with t h e Board's permission, and tha t t h e total investments

i n bank stocks b y a member bank should b e l imi ted t o 10 p e r cent of

t h e

cap i t a l

a n d

surplus

of the

member bank.

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1 3 6

7 -

X-6692-a

Mr. Walsh.- Mr. Walsh believes that t h e r ev i s ion of the Board's

condit ion of membership No. 3 is des i r ab le , b u t bel ieves that t h e p e r -

centages o f 50 p e r cent and 20 per cent contained i n th is rev is ion a s

s e t o u t i n t h e Board's letter (X-6646) should b e reduced to 25 p er

cent a nd 10 p e r cent , respect ively,

SAN

FRANCISCO.

Governor Calkins.

-

Governor Calkins approves

th e

proposed

r e -

vision contained i n t h e Board's le t t e r (X-6646) includ ing t h e p e r -

centages o f 50 p e r cent and 20 per cent contained therein. He s ta tes

tha t h e would be i n favor of a l imitat ion upon th e purchase of stock

of any one bank below th e 60 pe r cent contained i n t h e Board's p r o -

posed revision, i f such condi tion was p ra c t i ca l ly en fo rceab le. He

believes, however, that

i t c a n be

evaded,

a n d ,

therefore, approves

t h e

condition

a s se t ou t i n the

Board ' s l e t t e r .

Mr.

Sargen t . -

I n the

absence

of Mr.

Newton,

Mr.

Sargent, Assistant

Federal Reserve Agent a t San Francisco, advises that a r ev i s ion of the

Board's condition of membership No* 3 i s des i r ab le . ' He approves t h e r e -

v i s ion of this condition contained i n t h e Board's letter (X-6646.) con-

t a in ing t h e percentages contained therein of 50 p er cent and 20 p e r

cent , respect ively .

For the

Board's information, percentages

th e

various Governors

a nd

Federal Reserve Agents have suggested

th e

proposed revision

of

condit ion of membership No. 3 should contain may be b r i e f l y s e t ou t

a s follows:

P e r cent of stock : Per cent of cap-

of any one bank : i t a l a n d surplus

: of

member bank

may

: be invested i n bank

; stock

BOSTON - Deputy Governor Paddock 40$

M r. Curtiss 40%

i s i

40$

NEW YOEK - Governor Harr ison

_ M r .

Case

o i

0$

0$

PHILADELPHIZ'.«i>f)vernor Norris

M r. Austin

CLEVELAND

—

Governor Fancher

__ M r. DeCamp

50$

50&

20$ or 25$

20# or 25#

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1 3 7

8

X-6692-a

P e r

cent

o f

stock

of any one

"bank

P e r

cent

of cap-

i t a l

and.

surplus

o f member bank may

b e

invested

i n

bank

EI

CHMOiro

-

Governor Seay

M r.

Hoxton

25$

2 5

20$

2 0 i

ATLANTA

-

Governor Black

M r.

Newton

0$

0 #

0 $

0

i

CHICAGO - Governor McDougal

M r.

Heath

O i

0 i

ST.

LOUIS

-

Governor Martin

M r.

Wood

2 0

20#

20$

MINNEAPOLIS

-

Governor Geery

M r.

Mitchell

25$

0

i

20$

O i

KANSAS CITY

-

Governor Ba il ey

M r.

McClure

25$

5 0 i

25$

2 0 i

DALLAS

-

Governor Talley

M r. Walsh

20$

25

i

SAN IRAN CI SCO

- Governor Calkins

M r.

Sargent

50$

50$

20$

20$

Respectful ly ,

B. M.

Wingfield,

Assistant Counsel.

BMW: v b r - omc

frsbog_mim_v33_0129.pdf

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Transcript of frsbog_mim_v33_0129.pdf