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F o r iA N o . 131
j

Urrice Correspondence

FEDERAL RESERVE

BR
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A

rw A ril g , 19
p e 55.

To________________ Governor Eecles

Subject:____________________________ ____

From______________Mr. Clayton_________

_______________________________________




« po

When Mr. Giannini was here he pointed out
several matters in connection with the Banking Bill
as now drawn, which he thought needed attention by
way of an amendment. One in particular he was con­
cerned about, and U a . Collins, his local attorney,
f*
has also called respecting it. This is Section 209,
which provides for control of reserve requirements
by regulation of the Federal Reserve Board. The
present language does not cover the situation of
branch banking organizations whose head office may
be located in a central reserve city or a reserve
city but many of whose branches may be located in
communities where competing unit banks are required
to maintain much lower reserves than the home office
of the branch organization. The effect of this
might be to require the same reserves for deposits
in Fresno, California, for instance, as New York
City. Mr. Giannini and Mr. Collins, therefore, have
suggested that the section should be amended by
adding "or branches thereof”after the words "member
banks" in lines 5,6, and 7 at the top of page 57.

16— 852

FormTNo. 131

Office Correspondence
To_ Governor Eooles____________________
Frn m Mr. Vest. Assistant Counsel.

FEDERAL RESERVE
BOARD

Date May 1, 1935»

SnKjWf- Amendment relating to reserve
requirements proposed by Mr. Giannini.

It appears from Mr. Clayton’ memorandum attached that Mr.
s
Giannini and Mr. Collins, his local attorney, have suggested that
section 209 of the Banking Bill be amended by inserting the words
"or branches thereof’after the words '•member banks” in lines 5, 6
*
and 7 on page 57 of the bill so that the paragraph thus amended would
read as follows:
"Notwithstanding the other provisions of this
section, the Federal Reserve Board, in order to prevent
injurious credit expansion or contraction, may by regula­
tion change the requirements as to reserves to be main­
tained against demand or time deposits or both by member
banks or branches thereof in reserve and central reserve
cities or by member banks or branches thereof not in re­
serve or central reserve cities or by all member banks
or branches thereof."
It has been the position of the Federal Reserve Board for many
years that a member bank which is located in a reserve city and has
branches in non-reserve oities must maintain a reserve of 10 percent
against the aggregate demand deposits of its head office and its branches.
Mr. Giannini apparently desires that in such a case the demand deposits
received at the branoh in a non-reserve city should not be subject to a
10 percent reserve but should be subject only to the same reserve which
is required of competing member banks located in such non-reserve city
against their demand deposits. It is the apparent purpose of the amend­
ment proposed by Mr. Giannini that the Federal Reserve Board be given
authority to permit such lower reserve requirements for deposits re­
ceived at branches under such circumstances.
The position of the Board on this question is believed to be
correct under the provisions of existing law, but from a practical stand­
point there appears to be no sound reason why deposits received at a
branch in a non-reserve city should be subject to higher reserve require­
ments than deposits of other competing institutions there looated merely
because the head office of the bank is looated in a reserve or oentral
reserve city. It is understood that the primary reason for requiring
higher reserve requirements of banks located in reserve or central re­
serve oities was the faot that such banks usually have large amounts of
balances due to other banks located in smaller communities, and such
reason would not seem to be ordinarily applicable -with respect to branohes
located in non-reserve cities. Accordingly, it is believed that there is
no objection to the purpose which Mr. Giannini apparently has in mind in
making this proposal.




Governor Eccles - 2
However, it is doubtful whether the amendment proposed would
accomplish the result -which Mr, Giannini desires, beoause under his
proposal the Federal Reserve Board would be given the power to change
reserve requirements to be maintained by member banks or their branches
only "in order to prevent injurious credit expansion or contraction" and
it is diffioult to see just how a differentiation between the reserve
requirements at the head offices of banks and at their branohes could be
of any material aid in preventing injurious credit expansion or contrac­
tion.
If it is desired
seems to be desired by
by the addition of the
tion 19 of the Federal

to change the law so as to effect the result which
Mr. Giannini it is believed that it might be done
following paragraph after paragraph (c) in sec­
Reserve Acts

"For the purposes of paragraphs (a), (b) and (c)
above, the location of the head office of a member bank
shall govern as to reserves required to be maintained
against deposits payable at the head offioe, and the
location of a branch of a member bank shall govern as
to reserves required to be maintained against deposits
payable only at such branch."
It is questionable, however, -whether it is desirable to inject
this proposal into the proposed Banking Act of 1935. The subjeot involves
not only branch banking but also reserve requirements, both of vihich are
controversial. l!?hlle there is a provision in the House bill with refer­
ence to branch banking (requiring the consent of the Federal Reserve Board
for the establishment of out-of-town branohes of State member banks) it is
of minor importance and may not lead to the opening of any considerable
discussion of branch banking generally. The injection of another amend­
ment on this subjeot, however, would increase the chanpes that this ques­
tion might be opened. Moreover, the question of reserves of member banks
is one of the features of the banking bill which has been the subjeot of
considerable discussion and the provision which Mr. Giannini proposes to
amend (conferring authority upon the Federal Reserve Board to change
reserve requirements) is one of those upon which it is understood a fight
will be made by the opponents of the bill. Accordingly, it would seem
undesirable to include any more provisions than are necessary on this
subject.
I have oonferred with Mr. Smead regarding this matter and I believe
that his views coincide generally with those expressed above.




Respeotfully,

Geqpge B. Vest,
Assistant Counsel*