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ANALYSIS OF REPLIES RECEIVED IROU THE RESERVE BANKS
TO QUESTIONS RE MEMBERSHIP CONDITIONS (Letter 12-17-46)

Question 1. What has been the reaction of prospective and existing member
banks to the present standard conditions of membership?
(a) BOSTON:
No objection except to #6 in Connecticut.
(b) NEW YOJKi
No objection except to #3«
(c) PHILADELPHIA:
No objection except to •//7+ with regard to purchase
of controlled Savings and Loan shares for trust accounts and to #5 because of the prohibition against
participation of a mortgage not conforming to Section 24, F. R. Act.
(d) CLEVELAND:
No objection except to j}6 in Pennsylvania.
(e) RICHMOND:
No objection except to some special conditions and
possibly £4. as it pertains to investment of trust
funds in "interests."
(f) ATLANTA:
No objection except to 7f3 and from one bank rath
respect to §1+ which was not made applicable to a
competitor admitted before it was generally prescribed.
(g) CHICAGO:
No objection except to #3.
(h) ST. LOUIS:

c



No objection except #6.

- 2~

(i) MINNEAPOLIS:
No objection except to j - J3
(j) KANSAS CITY:
No objection except occasional question as to formula
for determining adequate capital under #2.
(k) DALLAS:
No objection except minor re #3*
(1) SAN ERANCISCO:
No objection except special conditions.
Summary of objections:
Condition / - I None.
/'.
$2. Kansas City.
#3»

New York; Atlanta; Chicago; Minneapolis;
Dallas.

irU. Philadelphia; Richmond; Atlanta.
#5.
$6.
Question 2.

Philadelphia.
Boston; Cleveland; St. Louis.

Do you consider it necessary or advisable to prescribe
£
conditions governing a bank after its admission to membership?

Answered affirmatively by all banks subject to the following
exceptions:
Boston would prescribe only necessary special conditions in
particular cases.

c

Richmond suggests that the Federal Reserve Act should be
amended to impose upon member banks the limitations and restrictions now imposed by standard conditions of membership
and that thereafter only necessary special conditions be
prescribed in particular cases.




- 3Minneapolis suggests^ amendment of Regulation H to substitute the following for the present provisions of Section 6 .
'
"Each member bank shall at all times conduct its
business and exercise its powers in accordance with
the applicable provisions of federal and state lav;
and in a safe and prudent manner. Should any member bank fail to do so, it shall be within the power
of the Board, after herring, to require such bank to
surrender its stock in the Federal Reserve Bank and
to forfeit all rights and privileges of membership.
Any decision of the Board on any issue of fact which
is supported by substantial evidence shall be final."
Question 3«

Co you recommend a modification, restatement, or elimination
of any of the present standard conditions? Do you recommend
any other conditions, and if so, r;hat? In this connection,
please consider the following more specific questions:

(a) Bearing in rand that standard condition numbered 3 relates only
to dealings in a particular class of asset and dealings in other
assets are not specifically mentioned in the standard conditions,
should this condition be eliminated, modified, or retoined in its
present form, and why?
(b) TJbat arguments can be made for the elimination or retention of
any or all of the three standard trust conditions (numbered 4, 5»
and 6)? Should there be any conditions relating to specific
practices in connection with the exercise of trust powers? Should
there be a general condition of broader scope relating to trust
activities?
(c) Are the first clauses of standard conditions numbered 1 and 2
necessary or desirable, and why?
The general question.
Only St. Louis and San Francisco recommend no modification,
restatement or elimination.
Suggestions for consolidation of conditions, inclusion in
statute, regulation or application form, and for certain eliminations,
are made. No new conditions are recommended except as indicated below.




Condition numbered 3«
Boston recommends no standard conditions.

c

r

4-

Nev; York, Philadelphia, Cleveland, Richmond, Atlanta,
Chicago, Minneapolis and Dallas recommend elimination.
St. Louis, Kansas City end San Francisco recommend retention:
St. Louis because it prevents a revival of an undesirable
practice; Kansas City because it is sound and properly integrated with
Section 5136, R. S.; San Francisco because it constitutes a v;arning to
State member banks that such practices are not permissible.
(b) Trust conditions.
No trust conditions:
Boston
Cleveland
Chicago
Minneapolis

Retain all or part:
New York
Philadelphia
Richmond
Atlanta

St. Louis
Kansas City
Dallas
San Francisco

Arguments and suggestions:
BOSTON: Elimination of trust conditions part of proposal to
eliminate all so-called standard conditions.
NEW YORK: Would eliminate #4 because self-dealing prohibited
by law.
Would eliminate 7 5 as not needed.
/
1 J u d retain #6 until all States provide statutory
'ol
preference for trust funds deposited.
No ^enercl truet condition of broader scope recommended.
PHILADELPHIA; Retain all as consistent t.lth generally accepted
principles and imposing proper standards.
No general condition of broader scope recommended.
D: Eliminate as superfluous and covered by applicable
State iar, at least in fourth district.
If #6 retained, exempt portion of uninvested trust
funds covered by FDIC insurance.

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-5 RICHMOND:

Sees no pressing need for elimination of trust

conditions which are based upon accepted trust principles.
Would eliminate words "or their interests" in #4.
ATLANTA:

Retain as based upon fundamental trust principles.
Suggest consideration of general condition requiring
agreement to be subject to a revised Regulation F, but
note obvious objection that present members would not be
subject to such condition.

CHICAGO:

Eliminate. Purpose served by State law.

ST. LOUIS: Recommend no change. Argument lengthy but generally to the effect that such conditions impose upon State
banks standards defined in Regulation F for national banks.
Recommend no other condition.
MINNEAPOLIS: Eliminate. Exercise of trust powers should be
in conformity with State law. The several footnotes with
respect to the conditions indicate that they are not to
bo taken literally.
KANSAS CITY: Recommend amplification of #4. to cover sale or
transfer.
Recommend clarification of #5 to require that State
banks operating common trust funds should do so in accordance with Section 17 of Regulation F.
Suggest amendment of #6 to except banks in States
that do not permit pledge of assets for the purpose.
Recommend that substance of sections 6 and 7 of Regulation F regarding trust management and regarding books and
accounts be added as conditions of membership.
DALLAS: Feel that present conditions constitute minimum
requirements.




Believe that ever long range an objective of prescribing condition requiring compliance with Regulation F would
be appropriate.
No condition of broader scope suggested.

c

-6 SAN FRANCISCO: Do not eliminate because of contractual aspect of membership and salutory effect of conditions on
members.
Discuss requiring compliance with substantially
all of Regulation F, but recognize legal or administrative
difficulty.
(c) First clauses of conditions 1 and 2.
BOSTON:

Eliminate all standard conditions.

NEW YORK:

Delete first part of both.

PHILADELPHIA: Consider first clauses desirable. Inclusion
serves to emphasize and strengthen position of Board and
Reserve Banks when corrective action is needed. Deletion
might be subject to erroneous interpretation.
CLEVELAND:

First clause #1 unnecessary.

First clause #2. "There has been no definition of
what constitutes adequate capital."
RICHMOND: Eliminate first clause #1, State in such general
terras as to be difficult of application.
Eliminate first clause #2. Also in general terms.
No formula for capital adequacy.
ATLANTA: Consider both first clauses desirable as they furnish
a starting point for any supervisory action in such matters.
CHICAGO:

Neither first clause necessary.

Provision of first clause §1 more adequately covered
by Section 30.
No standard established for first clause #2.
ST. LOUIS: Both considered desirable because they act as safeguards of the responsibilities of the Board and Reserve Banks
for supervision of State banks after admission to membership.
MINNEAPOLIS:

Eliminate.

KANSAS CITY:

Recommend deletion of both first clauses.




-7 #1. Ample means available for enforcing requirement
without statement in condition.
#2.

No definite standard.

DALLAS: Consider.desirable although may not be necessary. Although general, provide standards of seme value.
SAN FRANCISCO: Desirable.
#1 as basis for disciplinary action if needed.




#2 as springboard for demands for increasing
capital.
In summary:
Delete first part or
eliminate in toto:
Boston
New York
Cleveland
Richmond
Chicago
Minneapolis
Kansas City

Retain:
Philadelphia
Atlanta
St. Louis
Dallas
San Francisco