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108 X-7389 CONFIDENTIAL - Tentative Draft of March 29, 1933 Stevens - McDougal - Chicago Wood - Martin - St. Louis B a i l e y - G-eery - Minneapolis McClure - Hamilton - Kansas City Walsh - McKinney_- D a l l a s Newton - Calkins - San Francisco C u r t i s s - Young - Boston Case - Harrison - New York Austin - Morris - P h i l a d e l p h i a Williams - Fancher - Cleveland Hoxton - Seay - Richmond Newton - Black - A t l a n t a H. R. 375? providing f o r d i r e c t loans "by Federal r e s e r v e tanks t o nonmember S t a t e tanks and t r u s t companies which was quoted i n our Trans. 1722 of March 24, and was signed by President, on same d a t e , has "been given preliminary study here and requirements of "bill together w i t h t e n t a t i v e i n t e r p r e t a t i o n s and s u g g e s t i o n s w i t h regard to procedure thereunder are o u t l i n e d "below. (1) loans may be granted during e x i s t i n g emergency i n "banking or u n t i l "by proclamation of President a p p l i c a b l e p r o v i s i o n s of a c t s h a l l be declared no longer o p e r a t i v e , but i n no event a f t e r March 24, 1934. (2) Application may be made only t o Federal r e s e r v e bank of d i s t r i c t i n which nonmember S t a t e bank or t r u s t company i s l o c a t e d . (3) Loans may be made i n d i s c r e t i o n of Federal r e s e r v e bank, a f t e r i n s p e c t i o n and approval of c o l l a t e r a l and thorough examination of applying bank or t r u s t company. (4) Loans granted are to be made under terms provided i n s e c t i o n 10(b) of Federal reserve a c t as amended by s e c t i o n 402 of a c t of March 9, 1933, except that loans may be made upon e l i g i b l e as w e l l as i n e l i g i b l e s e c u r i t y . (5) Each a p p l i c a t i o n f o r loan s h a l l be accompanied by w r i t t e n approval of S t a t e Banking Department or Commission of S t a t e from which such bank or t r u s t company r e c e i v e d X-7389? —2— i t s charter and statement from such banking department or commission that i n i t s judgment such hank or t r u s t company i s i n sound c o n d i t i o n . (6) Hotes r e p r e s e n t i n g such loans (whether secured "by e l i g i b l e or by ineligible c o l l a t e r a l ) w i l l be e l i g i b l e as s e c u r i t y f o r c i r c u l a t i n g notes i s s u e d under s i x t h paragraph of s e c t i o n 18 of Federal Reserve Act as amended by s e c t i o n 401 of a c t of March. 9, 1933, to same extent as paper acquired under Federal r e s e r v e a c t , but w i l l not be e l i g i b l e as s e c u r i t y f o r Federal reserve n o t e s . (7) While such bank or t r u s t company i s indebted i n any way to any Federal reserve bank i t must comply i n a l l r e s p e c t s with p r o v i s i o n s of Federal r e s e r v e a c t and Board's r e g u l a t i o n s a p p l i c a b l e t o member State banks, except that i n l i e u Of subscribing to stock of Federal r e s e r v e bank i t must maintain the r e s e r v e balance required by s e c t i o n 19 of Federal reserve a c t . ing conditions should be observed: In view of c l a u s e four above f o l l o w - (a) Advances may be made only i n ex- c e p t i o n a l and exigent circumstances; (b) such advances may be made on demand or time note of a p p l i c a n t i n s t i t u t i o n , but Board f e e l s that maturi t y should not exceed 90 days; ( c ) such advances must be secured to s a t i s f a c t i o n of Federal r e s e r v e bank, and e l i g i b l e c o l l a t e r a l h e l d by applicant bank should be exhausted b e f o r e u t i l i z i n g i n e l i g i b l e a s s e t s ; (d) each advance should bear i n t e r e s t a t same r a t e as t h a t c u r r e n t l y a p p l i c a b l e t o advances t o member banks under p r o v i s i o n s of s e c t i o n 1 0 ( b ) ; ( e ) i n making such advances due regard should be had to claims and demands of member banks as provided i n s e c t i o n 4 of Federal r e s e r v e a c t and Board f e e l s t h a t such advances should be made only when a p p l i cants have shown to s a t i s f a c t i o n of Federal reserve bank that they are unable t o secure adequate c r e d i t accommodations from other banking in s t i t u t i o n s . X-7389 1 0 8 In view of clause seven above, borrowing i n s t i t u t i o n , while indebted to Federal reserve bank, ( f ) must maintain actual r e a l i z e d balance a t Federal reserve bank i n amount equal to reserve which would be required of i t under s e c t i o n 19 and Regulation D i f i t were a member bank and w i l l be subject to p e n a l t i e s f o r d e f i c i e n c i e s in r e s e r v e s ; (g) must remit a t par f o r checks drawn on i t and presented f o r payment by Federal reserve bank as required of member banks by Federal reserve a c t and Board's r e g u l a t i o n s ; (h) may be examined a t any time by Federal reserve bank or Federal Reserve *. Board and mast pay assessments f o r expenses thereof in same manner and to same e x t e n t as member banks; ( i ) mist make reports of c o n d i t i o n and of payment of dividends a s required of member State banks and w i l l be subject to same p e n a l t i e s f o r f a i l u r e to do so; ( j ) such bank must comply w i t h c a p i t a l requirements regarding e l i g i b i l i t y of State banks f o r membership and must conform to p r o v i s i o n s of law which p r o h i b i t n a t i o n a l banks from lending on or purchasing t h e i r own stock, which r e l a t e to withdrawal or impairment of c a p i t a l stock and which r e l a t e to payment of unearned d i v i d e n d s . The i n t e r p r e t a t i o n s and suggestions o u t l i n e d h e r e i n are not intended to be f i n a l and i f in any a c t u a l case you are doubtful a s to proper determination of any question upon which you d e s i r e Board 1 s r u l i n g i t w i l l g i v e prompt consideration to such question when submitted w i t h your recommendation a s to a c t i o n which should be taken accompanied by your c o u n s e l ' s opinion on matters of law involved. 1 0 9 -4- X-7389 Suggest that your counsel prepare forms of a p p l i c a t i o n , promissory n o t e s , r e s o l u t i o n s of d i r e c t o r s and other papers along l i n e s of those used in connection w i t h advances to member banks under s e c t i o n 10(b) of Federal Reserve Act with such changes and a d d i t i o n s as in opinion of your counsel w i l l adequately p r o t e c t i n t e r e s t s of Federal reserve bank i n c l u d i n g p r o v i s i o n in a p p l i c a t i o n that at option of Federal reserve bank any f a i l u r e to comply with a p p l i c a b l e p r o v i s i o n s of law or r e g u l a t i o n s of Federal Reserve Board or of agreement w i t h Federal reserve bank s h a l l c o n s t i t u t e d e f a u l t upon any or a l l advances made by Federal reserve bank to a p p l i c a n t and a p p l i c a n t ' s e n t i r e indebtedness to Federal reserve bank s h a l l thereupon become due and payable. In t h i s connection i t i s suggested that your counsel consider p r o v i s i o n s included in a p p l i c a t i o n form i n c l o s e d i n our l e t t e r of J u l y 26, 1932, (X-7213). Suggest a l s o that your counsel t i o n s of nonmember banks read c a r e f u l l y debates i n Congressional Record on t h i s a c t and e s p e c i a l l y Senate debates on March 22 and 23 which i n d i c a t e c l e a r l y that Federal reserve banks are not expected to make loans to i n s o l v e n t banks nor to g i v e nonmember banks more favorable treatment than member banks. Morrill.
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