51

FEDERAL RESERVE BOARD

WASHINGTON ADDRESS OFFICIAL C O R R E S P O N D E N C E T O

T H E FEDERAL R E S E R V E B O A R D X-7356

March 11, 1933.

SUBJECTi Conditions of membership which w i l l be prescribed for State banks hereaf ter admitted to membership i n the Federal Reserve Systemi

Bear S ir :

I t has been the Federal Reserve Board's p r a c t i c e , as you know,

to prescribe for State banks applying for membership i n the Federal Reserve

System the seven condit ions of membership contained i n the Board's Regula-

t ion E and such spec ia l conditions as the f a c t s i n each individual case

indicated were des irable to correct unsat i s fac tory condit ions i n the

bank and to prevent the exerc ise of powers which the bank might have under

i t s charter or the State law that were not cons is tent with the purposes of

the Federal Reserve Act and considered undesirable in a commercial banking

i n s t i t u t i o n . Some of these spec ia l conditions have been of a general

nature and the Board f e e l s that i t would be advisable hereaf ter to pre-

scribe for each State bank applying for membership a l l spec ia l condit ions

of th i s character which have been approved by the Board and which tend to

prevent unsound developments in banks regardless of whether the bank

appears to be engaged i n pract ices at the time of admission to membership

which may lead to such developments. I t i s be l ieved that t h i s procedure

w i l l be he lp fu l i n developing a more e f f e c t i v e supervis ion of banking

i n the Federal Reserve System and w i l l tend to develop be t t er banking

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

X-7356

-2~

p r a c t i c e s , and i t i s contemplated that i f the Board's experience i n d i -

cates that any further condit ions of a general nature are des irable

they a l s o w i l l be prescribed for State banks subsequently admitted to

membership.

Some of the condit ions contained i n the Board's Regulation H

are very broad i n the ir terms and i t i s pos s ib l e that there i s some

overlapping of these condit ions and cer ta in of the condit ions regard-

ing s p e c i f i c prac t i ce s or powers; but t h i s i s not be l i eved to be

object ionable . Accordingly, in the case of each State bank hereaf ter

applying for membership, the Board w i l l prescribe the fo l lowing condi-

t ions of membership which include the seven condit ions contained i n

the Board's Regulation H, with one r e v i s i o n , and other condit ions of a

general nature that have been approved i n substance by the Board as

spec ia l condit ions i n indiv idual cases:

1 . Except with the permission of the Federal Reserve Board, such bank sha l l not cause or permit any change to be made in the general character o f i t s business or i n the scope of the corporate powers exercised by i t at the time of admission to member-ship.

2. Such bank s h a l l at a l l times conduct i t s business and exerc i se i t s powers with due regard to the s a f e t y of i t s depos i tors .

3 . Such bank s h a l l maintain i t s loans within the l i m i t s prescribed by the laws of the State in which i t i s l oca ted .

4 . The board of d irectors sha l l not permit loans to d i r e c t o r s , o f f i c e r s , employees, pr inc ipal s tock-holders and/or the ir i n t e r e s t s , including loans t o , or upon the secur i ty of stocks o f , corporations i n which any of them have substant ia l i n t e r e s t s , to assume unduly large proportions or to endanger the bank's solvency or the l i q u i d i t y of i t s a s s e t s , and the Board of d irectors s h a l l g ive spec ia l a t t e n t i o n to a l l such loans .

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

53 _3_ X-7356

5» Such "bank sha l l maintain adequate credit data i n con-nect ion with a l l unsecured loans .

6. Such hank s h a l l keep past due paper and overdrafts at a minimum, and sha l l not hold any checks i n cash items to avoid overdrafts ,

7 . Except with the permission of the Federal Reserve Board, such hank s h a l l not purchase or acquire through any device whatever any stock of any other hank, t rus t company, or other corporation of any kind or character except i n s a t i s f a c t i o n or protect ion of debts previous ly con-tracted i n good f a i t h ; and a l l stock acquired in s a t i s -f a c t i o n or protect ion of debts sha l l be disposed of within s i x months from the date on which i t was acquired unless the time i s extended by the Federal Reserve Board on the app l i ca t ion of such bank for good cause shown.

8 . Such bank s h a l l not permit any investment i n a bank bui ld ing or i n a s i t e for a bank bui ld ing to assume such proportions a s , i n the judgment of the Federal Reserve Board, would endanger the bank's solvency or l i q u i d i t y or would otherwise be unduly large or improper, and before any investment i s made in a bank bui lding or a s i t e for a bank bui lding the bank sha l l r e f e r the matter to the Federal Reserve Board for cons iderat ion.

3, Such bank s h a l l not reduce i t s capi ta l stock except with the permission of the Federal Reserve Board.

10. Such bank s h a l l not pay any dividends which w i l l reduce i t s surplus below an amount equal to at l e a s t 20 per cent of i t s cap i ta l stock, and i f at any time i t s sur-plus should be l e s s than 20 per cent of i t s cap i ta l stock i t s h a l l carry to i t s surplus account annually, or for any shorter period covered by each c lo s ing of i t s books, not l e s s than 50 per cent of i t s net earn-ings for any such period a f t e r deducting a l l l o s s e s and providing reserves for depreciat ion.

11. Such bank sha l l reduce to an amount equal to 10 per cent of i t s capi ta l and surplus a l l balances i n excess thereo f , i f any, which are carried with banks or trust companies which are not members of the Federal Reserve System, and sha l l at a l l times maintain such balances wi thin such l i m i t s .

12. Except with the permission of the Federal Reserve Board, such bank sha l l not , a f t e r t*he date of i t s admission to membership, engage i n the business of i s s u i n g or s e l l i n g , e i ther d i r e c t l y or i n d i r e c t l y (through a f f i l i a t e d corpor-a t ions or otherwise) , notes , bonds, mortgages, c e r t i f i -c a t e s , or other evidences of indebtedness represent ing

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

X-7356 54

- 4 -

real e s t a t e loans or par t i c ipa t ions there in , e i ther with or without a guarantee, indorsement or other ob l iga t ion of such "bank or an a f f i l i a t e d corporation.

13. Such "bank may accept d r a f t s and b i l l s of exchange drawn upon i t of any character permitted "by the laws of the State of i t s incorporation; "but the aggregate amount of a l l acceptances outstanding at any one time s h a l l not exceed the l imi ta t ions imposed "by s e c t i o n 13 of the Federal Reserve Act, that i s , the aggregate amount of acceptances outstanding at any one time which are drama for the purpose of furnishing do l lar exchange i n countries s p e c i f i e d by the Federal Reserve Board s h a l l not exceed 50 per cent of i t s cap i ta l and surplus, and the aggregate amount of a l l other acceptances, whether domestic or f o r e i g n , outstanding at any one time s h a l l not exceed 50 per cent of i t s cap i ta l and surplus , except that the Federal Reserve Board, upon the appl ica t ion of such bank, may increase t h i s l imi t from 50 per cent to 100 per cent of i t s cap i ta l and surplus; provided, however, that i n no event s h a l l the aggregate amount of domestic acceptances outstanding at any one time exceed 50 per cent of the cap i ta l and surplus of such bank.

14. The board of d irectors of such bank s h a l l adopt a reso-l u t i o n authorizing the interchange of reports and i n f o r -mation between the Federal reserve bank of the d i s t r i c t i n which such bank i s located and the banking a u t h o r i t i e s of the State i n which such bank i s l oca ted .

The Board w i l l a l so prescribe for each trust company or bank

exerc i s ing trust powers at the time of i t s admission to membership the

fo l lowing condit ions of membership which are appropriate for i n s t i t u t i o n s

exerc i s ing trus t powers:

15. Such bank sha l l not , a f t e r the date of i t s admission to membership, invest trust funds held by i t i n ob l igat ions of the bank's d i rec tors , o f f i c e r s , employees or the ir a f -f i l i a t i o n s or corporations a f f i l i a t e d with the bank.

16. Except with the permission of the Federal Reserve Board, such bank s h a l l not , a f t e r the date of i t s admission to membership, invest the funds of various t r u s t s held by the bank i n part ic ipat ions i n pools of mortgage bonds or other

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

- 5 - X-7356 55

s e c u r i t i e s , and the funds of a l l such trus t s s h a l l be invested separately from each other: Provided, how-ever, that the Federal Reserve Board w i l l not object to the c o l l e c t i v e investment of small amounts of trust funds where the c&sh balances to the cred i t of cer ta in t rus t e s t a t e s are too small to be invested separately to advantage, i f the bank owns no par t i c ipa t ion in the s e c u r i t i e s in which such c o l l e c t i v e investments are made and has no i n t e r e s t in them except as trus tee or o ther f iduc iary .

17. I f trust funds held by such bank are deposited in i t s banking department or otherwise used in the conduct of i t s bus iness , i t s h a l l deposit with i t s trust department s ecur i ty in the same manner and to the same extent as i s required of nat ional banks exerc i s ing f iduc iary powers.

Attention i s ca l l ed to the f a c t that the condit ion numbered

seven above i s a r e v i s i o n of the condition numbered three contained in

the Board's Regulation H and prohib i t s the a c q u i s i t i o n of s tock in any

other corporation except with the Board's permission. As you know, t h i s

condition as contained in the Board's Regulation H re fers only to the

acqu i s i t i on of s tock of other banks and trus t companies; but the Board

b e l i e v e s that i t i s des irable in future cases to prescribe a condition

which w i l l prohib i t the member bank from purchasing stock in any corp-

oration except with the Board's permission.

In connection with the condition numbered 10 i t may be noted

that i f in any case the appl icat ion of a bank with a surplus of l e s s than

20$ of i t s c a p i t a l i s approved the Board w i l l prescribe an addi t ional

requirement that the surplus s h a l l be increased to at l e a s t 20$ *f the

bank's c a p i t a l out of earnings.

One of the condit ions contained in the Board's Regulation H and

se t out above provides that , except with the permission of the Federal

Reserve Board, a member bank sha l l not cause or permit any change to be

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

56

- 6 - X-7356

made in the general character of i t s business or in the scope of the

corporate powers exerc ised "by i t a t the tijne ef admission to membership.

In some cases State member banks have overlooked t h i s requirement and

have made changes in the general character of the ir a s s e t s or in the

scope of the corporate powers exercised at the time of the i r admission

to membership without obtaining the Board's permission. Accordingly, in

the l e t t e r prescr ib ing condit ions of membership which i s addressed to

each State bank whose appl icat ion i s approved hereaf ter , spec ia l a t t e n -

t ion w i l l be c a l l e d to the neces s i ty for obtaining the Board's permission

under t h i s general condition covering any such change made by the bank

a f t e r i t s admission to membership in the System.

You w i l l understand that in part icu lar cases i t may be des irable

to prescribe spec ia l conditions nnt of a general nature to correct

unsat i s fac tory condit ions in the part icu lar bank, and, as a matter of

emphasis, to prescribe condit ions prohibi t ing , except with the Board's

permission, the exerc i se of s p e c i f i c powers which a par t i cu lar bank may

be authorized to exerc ise under i t s charter or the State law, even though

such powers are not exerc ised at the time of admission to membership and

accordingly, under the general condition referred to above, might not be

exercised except with the Board's permission. In connection with the sub-

mission of appl i ca t ions f o r membership, the Board would, of course, l i k e

to have your recommendation as to any spec ia l conditions which should be

prescribed in the part i cu lar case and as to any conditions of a general

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

- 7 - X-7356

nature which experience ind ica tes would be des irable as condit ions to

be prescribed for each State bank thereaf ter admitted to membership.

-Very truly yours,

Chester Morri l l , Secretary.

P. S. This l e t t e r i s a confirmation of the telegram sent you today.

10 ALL EEDERAL RESERVE AG-ENTS

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