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X-6521 CP OY O "- March 1, 1930. To The. Federal Reserve Board From Mr. Wyatt, General Counsel. SUBJECT: Recommendations, Regulations and Administrative P o l i c i e s re Branch, Chain and Group Banking. In accordance with the Board's request, I submit below a suntmary of the recommendations of the Federal Reserve Board, the Federal Advisory Council, and the Conferences of Governors and Federal Reserve Agents, and of the regulations and administrative p o l i c i e s of the Federal Reserve Board, with regard to "branch, group and chain banking. This may not be satisfactory, because I have only a general idea of what the Board desires and i t has been prepared very hurriedly. I shall be glad to supplement or revise i t in any way the Board may desire. Because of their interrelation, the recommendations of the Federal Advisory Council and the Conferences of Governors and Federal Reserve Agents have been discussed together with the Board's recommendations , regulations, and administrative p o l i c i e s . The subjects of domestic branches, chain banking and foreign branches, however, have been discussed separately. DOMESTIC BRANCHES 1. Annual Report for 1915. - In i t s annual report for the year 1915, p. 22, the Federal Reserve Board recommended to Congress that national banks be permitted to establish branch o f f i c e s within the c i t y , or within the county in which they were located. The Federal Advisory Council, under dates of September 21 and November 16, 1915, had recommended that the national bank act be amended so as to permit -2- X-6521 national "banks to establish tranches under certain conditions. 2, Recommendations during 1916. - Consistently with this recommendation, the Board in 1916 prepared and transmitted to Congress the draft of an amendment to the Federal reserve act. In the terms of this amendment national banks located in c i t i e s of 100,000 and over having a capital and surplus of $1,000,000 or more would have been permitted to establish branches within the corporate limits of the c i t i e s in which they were located, and any national banks located in other places would with approval of the Federal Reserve Board and under such regulations as the board might prescribe have been permitted to establish branches within the limits of the county in which they were located or within a radius of 25 miles, irrespective of county l i n e s , but not in any case outside the State or Federal reserve d i s t r i c t of the parent bank. (Federal Beserve Bulletin, pp. 323, 327; 1916 Annual Report, pp. 29, 145.) Under date of November 20, 1916, the Federal Advisory Council renewed i t s recommendation regarding the establishment of branches by national banks "but added that the privilege of establishing branches should apply to a l l banks in the national banking system and not only to such national banks as were located in States which permitted State institutions to establish branch banks. (See pages 28 and 34 of 1916 Recommendations.) An amendment drawn in compliance with the recommendations of the Board was adopted by the Senate, during 1916, and together with other amendments was referred to a conference committee of the House -3and Senate. X-6521 iJ_L- In conference i t developed that the amendment was not acceptable to the House conferees and the Senate on recommendation of i t s conferees receded from i t s proposal. (1916 Annual Report, p. 135). 3. Annual Report for 1917. - In i t s 1917 Annual Report to Congress, page 33, the Board recommended an amendment to the Federal Reserve Act to provide that any national bank located in a c i t y or incorporated town of more than 100,000 inhabitants, and possessing a capital and surplus of $1,000,000 or more, may, under such rules and regulations as the Federal Reserve Board may prescribe, establish branches, not to exceed 10 in number, within the corporate limits of the c i t y or town in which i t i s located, provided that no such branch shall be established in any State in which neither State banks nor trust companies may lawfully establish branches. The Board stated that "State b;:jiks which become members of the Federal reserve system are allowed by law to retain any branches which may already be in existence and, with the approval of the Board, to establish new branches. National banks which have taken over State banks having branches are permitted to continue the operations of these branches. There seems to be no reason for such discrimination between members of the Federal reserve system, and with the view of placing them more nearly upon terms of equality, besides affording in many cases better service to the public, i t i s recommended that provision be made for the establishment of branches by national banks, under proper limitations." 4. Annual Report for 1918. — In i t s 1918 report to Congress, -4- X-6521 p, 85, the Board renewed i t s recommendation, expressing the opinion that national "banks were "at a serious disadvantage in meeting the competition of State "banks with "branches," and that "the proper development of the Federal reserve system makes i t necessary to coordinate as far as possible the powers of a l l member banks." This coordination of powers could not be effected without amendment of existing laws under which "some member banks, both national and State, are given advantage over other member banks." The Board renewed i t s recommendation of pre- vious years, being confident that the proposed amendment would "prove beneficial to the Federal reserve system, as ?rell as to the communities concerned." The Federal Advisory Council also renewed i t s recommendation that an amendment of this character should be enacted, (p. 6, 1918 Eecommendations of Federal Advisory Council.) 5. Developments during 1919. - In 1919, a M i l was passed by the Senate which proposed to authorize national banks in c i t i e s of 500,000 or more population, having a capital and surplus of $1,000,000 or more, to establish not exceeding 10 branches within the corporate limits of the c i t i e s in which they were located, provided State law extended a similar privilege to State banking i n s t i t u t i o n s . Under date of September 16, 1919 the Federal Advisory Council urged the Federal Reserve Board to use every e f f o r t to secure the passage of t h i s b i l l in the interest of sound banking and the granting of equal banking f a c i l i t i e s to a l l people in the same business, (p. 19 of 1919 He commendations of Federal Advisory Council). 6. AppyaT import for 1919. - The Board in i t s Annual Report for the year 1919, p. 64, made substantially the same recommendation regarding the branch banking amendment as i t had made in i t s Annual Report for the -5- X-6521 S I year 1918, and commented upon the "bill above referred to as follows: "Under the present law national hanks can not afford the same f a c i l i t i e s to the public as are given hy State hanks having branches, except in cases where State banks and trust companies operating branches have merged with national banks, when existing branches may be continued by the national banks, * * * While the board would prefer to have this privilege (of establishing branches) extended to national banks in c i t i e s of not l e s s than 100,000 inhabitants, or, f a i l i n g that, have the population limit raised to 200,000, i t wishes to point out that the limit fixed in the Senate b i l l does not a f f e c t the principle involved, and i t therefore respectfully recommends once more that national banks be permitted to establish branches in the c i t i e s in which they are located under such limitations as in the wisdom of Congress may be deemed desirable." 7. Recommendation of Agents1 Conference in 1931. - The Conference of Federal Reserve Agents held in October, 1921, adopted a resolution favoring the establishment of branches in the same city in which a national bank i s located, provided State banks are permitted that privilege under State law. (Pp. 111-115 of proceedings of October, 1921, Conference of Federal Reserve • Agents.) 8- Aflrma.1 Report for 1922. -« Again in i t s report for 1922, pages 5-6, the board commented b r i e f l y upon branch banking developments, noting that the establishment of branches by the larger State banks "had gone so far in a few States, notably California, and in a few large c i t i e s , including New York, Cleveland, and Detroit, as to reduce greatly the number of national banks.11 The Board expressed the opinion that the action of the Comptroller of the Currency in permitting national banks to open "additional offices" within the corporate limits of the c i t i e s in which they were located in States which permitted branch banking "does, not meet the situation in California and does not f u l l y meet i t in the c i t i e s mentioned," o -6- ; •"• ' X-6521 and that "an amendment to the national banking act allowing national "banks the same privilege given to State "banks in States where "branch "banking i s permitted i s much to "be desired." In this connection the "board noted a suggestion made "by the Joint Commission of Agricultural Inquiry in i t s report to Congress dealing with the problem of rural credit, to the e f f e c t that "a system of limited "branch "banking might furnish a possible solution of this problem." Upon this suggestion the board commented as follows: "Such systems are in fact already established in some sections of our country, notably in California, and appear to have gone far toward solving the problem. Branch banking has lowered the rate of interest in some of the leading agricultural sections of California, and at the same time has provided added security for the deposits of farmers. There are interesting neighborhood branch banking groups in other States, which appear to be serving their communities well." 9. Annual Report for 1923. - Finally, in i t s 1923 report, page 48, the board notes the d i f f i c u l t i e s which originate in the differences of State laws and the competitive disadvantages under which national banks operate in States which permit branch banking, and expresses the hope "that i t can by administrative measures find some reasonable method of harmonizing existing differences of interest of State and national banks in the matter of branch banking, and thus lay the basis for a policy which will result in shaping the development and practice of branch banking in the United States along useful and serviceable lines." 10. s t r a t i v e Policy of the Board -prior to November. 1923. - In acting upon applications of State member banks for permission to establish additional branches within the system the board had prior to November, 1923, considered each case upon i t s own merits, giving consideration to public • -7- X-6521 ' i- convenience and. to the parent bank's capacity for properly organizing the branch and assimilating the business taken over. As a matter of general policy rather than s p e c i f i c a l l y of branch banking policy, the board in individual cases withheld i t s approval until s a t i s f i e d that establishment of the additional branch or branches in question would not impair the solvency or liquidity of the parent bank. I t gave consideration to the rate of expansion of the given branch system; co-ordination of branches already acquired; head-office control, supervision, and personnel; a f f i l i a t i o n with outside corporations; relation of capital and surplus to depesit l i a b i l i t i e s , especially in rapidly expanding branch systems; methods of acquiring branches; and generally to local conditions and needs in so far as these could be clearly defined. The Board distinguished branches from paying and receiving stations not vested with discretionary power to make loans, except for inconsiderable sums and while reserving the right to reconsider in case such o f f i c e s in any instance developed into full-fledged branches, i t made approval of such outside o f f i c e s more or less a matter of form, except where i t appeared that the expense of maintaining them might impair the capital of the bank. Although the board had not formulated any arbitrary rule requiring simultaneous examinations of head o f f i c e s and branches, i t had nevertheless regarded any evidence of i n a b i l i t y on the part of State authorities to conduct proper examinations of banks maintaining extensive branch systems as being in i t s e l f adequate j u s t i f i c a t i o n for limiting further expansion of such systems. Responsibility for the conduct of adequate examinations, i t has been f e l t , must in the case of member as of nonmember banks foe assumed primarily by State authorities rather than in the case of member -8- X-6521 "banks "by the Federal reserve "bank of the given d i s t r i c t . In general, i t may be observed that prior to November, 1923, the board permitted expansion of member bank branch systems under State supervision and control, in so far as such expansion was consistent with sound banking principles of e f f i c i e n t administration, adequate State supervision, and complete solvency. 11. Resolution of November 7. 1923. - On November 7, 1923, fee Federal Reserve Board adopted a resolution (X-3881) formulating certain general principles for guidance of the Board in acting upon individual cases presented to i t in applications for admission to membership of State banks operating branches outside the city or town or contiguous territory in which the parent bank was located and in applications of State member banks for permission to establish such branches. This resolution reads as follows: "Resolved. That the Board continue hereafter as here tofore to require State banks applying for admission to the Federal reserve system to agree as a condition of membership that they w i l l establish no branches except with the permission of the Federal Reserve Board; be i t further "Resolved. That, as a general principle, State banks with branches or additional o f f i c e s outside of the corporate limits of the city or. town in which the parent banks are located or territory contiguous thereto ought not be admitted to the Federal Reserve System except upon condition that they relinquish *such branches or additional o f f i c e s ; be i t further "Resolved, That, as a general principle* State banks which are members of the Federal Reserve System, ought not be permitted to establish or maintain branches or additional o f f i c e s outside the corporate limits of the c i t y or town in which the parent bank i s located or territory contiguous thereto; be i t further "Resolved, That in acting upon individual applies- -9- X-5521 0 tions of State "banks for admission to the Federal Reserve System and in acting upon individual applications of State "banks which are members of the Federal Reserve System for permission to establish "branches or additional o f f i c e s , the Board, on and after February 1, 1924, w i l l "be guided generally "by the above principles; "be i t further 1 1 He solved. That the term 1 territory contiguous thereto ' as used above shall mean the territory of a c i t y or town whose corporate limits at some point coincide with the corporate limits of the city or town in which the parent bank i s located; be i t further "Resolved. That this resolution i s not intended to a f f e c t the status of any branches or additional o f f i c e s established prior to February 1, 1924, either those of banks a t the present time members of the Federal Reserve S y s t e m or those of banks subsequently applying for membership in said system." The Federal Advisory Council, however, was not inclined to favor this resolution. Under date of November 19, 1923, i t stated with refer- ence to the resolution that "it believes that the resolution, i f carried into e f f e c t , w i l l give a position of monopoly to those State banks that have established State-wide systems of branches, while those State banks that have refrained from branch banking will be placed in a position of great disadvantage" (p. 11 of 1923 Recommendations of Federal Advisory Council.) 12. Recommendations re McFadden Bill.. - On February 11, 1924, the so-called McFadden b i l l was introduced in Congress giving to national banks the rignt to establish branches and imposing some, restrictions upon the establishment of branches by State member banks of the Federal reserve system. As has been shown above, the Board had repeatedly recommended, the enactment of l e g i s l a t i o n authorizing the establishment of domestic brancnes oy national banks and a number of b i l l s designed to accomplish this general purpose were introduced from time to time. These b i l l s were , —0 1— X—6521 ill various forms and. contained various limitations and restrictions, "but none of them was ever passed by Congress. On May 26, 1924, and April 23, 1925, in l e t t e r s addressed to Congressman McFadden and Senator McLean, respectively, the Board expressed i t s general approval of the McFadden t i l l . The Federal Advisory Council in 1924, 1925 and 1925 also recommended enactment of the t i l l , and on February 25, 1927, i t was f i n a l l y enacted into law. 13. Administrative Policy during 1924. ~ At i t s meeting on Ja&uary 7, 1924, the Board gave consideration to the applications of three "banks for permission to establish branches from time to time over a period of several months in accordance with contemplated programs of development, and adopted a resolution to the following e f f e c t : That no blanket author- i t y to establish branches would be granted} that each application must be presented separately in regular form and manner, subject to approval of the State banking authorities and a recommendation of the Federal reserve bank of the d i s t r i c t ; that applications to establish branches in noncontiguous territory, f i l e d before February 1 (under the board's resolution of November 7) might be considered by the board after that date; and that the board reserved right to pass on each application on i t s merits. (See X-3937). 14. Regulations of 1924. - On March 27 the board issued a revised and further elaboration of i t s regulations formulated under that general provision of the Federal reservo act which authorizes i t to prescribe conditions of membership for State banking institutions applying for admission to the system. In these regulations, as amended a month l a t e r , on April 7, the board took occasion to give more formal statement than i t had rw _ _ L. -11- X-6521 previously given to principles ?;hich would, govern i t in approving the establishment of "branches. By Section IV of i t s Regulation H, as amended. April 7, 1924, the Board stated that i t would prescribe the following conditions of membership for every S t a t e "bank thereafter admitted to the Federal Reserve System: "(4) Such "bank or trust company shall not, except after ap-olying for and receiving the permission of the Federal Reserve Board, establish any branch, agency, or additional o f f i c e . "(5) Such bank or trust company, except after applying for and receiving the permission of the Federal Reserve Board, shall not consolidate with or absorb or purchase the assets of any other bank or branch bank for the purpose of operating such bank or branch bank as a branch of the applying bank; nor directly or indirectly, through a f f i l i a t e d corporations or otherwise, acquire an interest in another bank in excess of 20 per cent of the capital stock of such other bank; nor directly or indirectly promote the establishment of any new bank for the purpose of acquiring such an interest in i t ; nor make any arrangement to acquire such an interest." These conditions were prescribed for a l l State banks and trust companies which were admitted to membership between April 7, 1924, and February 25, 1927, and were conditionally prescribed for a l l institutions admitted between February 25, 1927, and January 3, 1928. Prior to April 7, 1924, these conditions, or conditions substantially similar thereto, were prescribed for special reasons for a number of State banks and trust companies admitted to the System. In Section VI of the same Regulation, the Board stated the administrative policy which i t would pursue in acting upon applications for permission to establish branches under these conditions of membership as follows: -12- "SECTION VI. X-6521 PRINCIPLES G V R I G ESTABLISHMENT OF BRANCHES O E NN - "In passing upon applications "by State "banks and trust companies for permission to establish branches, agencies or additional o f f i c e s , under condition No. 4 of Section IV, or under any similar condition which may have been prescribed by the Federal Reserve Board and agreed to by any bank or trust company heretofore admitted to the Federal Reserve System, the Federal Reserve Board w i l l observe the following principles"(l) The Federal Reserve Board will as a general principle r e s t r i c t the establishment of branches, agencies or additional o f f i c e s by such banks or trust companies to the c i t y of location of the parent bank and the territorial area within the State contiguous thereto, as said territory has been defined in the board's resolution of November 7, 1923, excepting in instances where the State banking authorities have c e r t i f i e d and the board finds that public necessity and advantage render a departure from the principle necessary or desirable. "(2) The Federal Reserve Board as a general principle w i l l not consider an application by such bank or trust company for a permit to establish a branch, agency or additional o f f i c e , unless the authorities of the State in which such bank i s located regularly make simultaneous examinations of the head o f f i c e and a l l branches, agencies or additional o f f i c e s of such bank, nor unless the examinations made by the State authorities are, in the judgment of the Federal Reserve Board, of such character in every respect as to furnish the Federal Reserve Board with s u f f i c i e n t information as to the condition of such bank and the character of i t s management to enable the Federal Reserve Board f u l l y to protect the interests of the public. "(3) The Federal Reserve Board as a general principle w i l l require each bank or trust company which establishes or maintains branches, agencies or additional o f f i c e s to maintain for i t s e l f and such branches, agencies or additional o f f i c e s an adequate ratio of capital to total l i a b i l i t i e s and an adequate percentage of i t s total investments in the form of paper or securities e l i g i b l e for discount or purchase by Federal reserve banks. "(4) The Federal Reserve Board w i l l not consider any application to establish a branch, agency or additional o f f i c e u n t i l the State banking authorities have approved the establishment of such branch, agency or additional o f f i c e , and the directors or executive committee and the Federal reserve agent of the Federal reserve bank of the d i s t r i c t in which such bank or trust company i s located have made a report upon the financial condition of the -15- x-6521 ; applying bank or trust company, the general character of i t s management, what e f f e c t the establishment of such branch, agency or additional o f f i c e would have upon other banks or branches in the l o c a l i t y in which i t i s to be established, and whether, in their opinion, i t would be in the interest of the public in such l o c a l i t y , together with their recommendation as to whether or not the application should be granted. "(5) When permission i s granted for the establishment of such branch, agency or additional o f f i c e same shall be established and opened for business within s i x months after such permission i s granted. If such branch, agency or additional o f f i c e i s not established within such time the permit shall become void, unless the time i s extended by the board for good cause. "(6) The Federal Reserve Board reserves the right to cancel any permit which i t may grant hereafter to establish any branch, agency or additional o f f i c e whenever i t shall appear, after hearing, that such branch, agency or additional o f f i c e i s being operated in a manner contrary to the interest of the public in the l o c a l i t y in which i t i s established." 15. After the McFadden Act. # As a result of the amendments to the Federal Reserve Act contained in the McFadden Act, the Board issued a new set of regulations applicable to member banks which became e f f e c t i v e on January 3, 1928. Before these new regulations became e f f e c t i v e and after the passage of the McFadden Act, a number of State banks and trust companies were admitted to membership in the System. These banks and trust companies were admitted subject to certain conditions of membership, which usually included the conditions in the 1924 Regulations regarding the establishment of branches, and such conditions were subject to any changes which the Board found to be necessary on account of the amendments to the Federal Reserve Act contained in the McFadden Act. After the Board's 1928 Regulations became effective, (January 3, 1928), these banks were advised of the new conditions of membership to which they were subject. As the McFadden Act prescribed the conditions under which branches might be established by —4 3— . X-6521 State member "banks, the Board did not include a condition in these new regulations in that connection. In Section V of Regulation H, however, i t stated i t s interpretation of the provisions of the McFadden Act regarding branches of State member banks as follows: "1. Any State member bank which, on February 25, 1927, had established and was actually operating a branch or branches in conformity with the State law i s permitted to retain and operate the same while remaining a member of the Federal reserve system, regardless of the location of such branch or branches. "2. Any nonmember State bank which, on February 25, 1927, had established and was actually operating a branch or branches in conformity with State law may, i f otherwise e l i g i b l e , become a member of the Federal reserve system and retain and operate such branches, regardless of their location. "3. In order to remain system, every State member branches established after porate limits of the city, parent bank i s situated. a member of the Federal reserve bank mast relinquish any branch or February 25, 1927, beyond the cortown, or village in which the "4. Any State member bank which establishes any branch or branches after February 25, 1927, beyond the corporate limits of the city, town, or v i l l a g e in which the parent bank i s situated must either (a) relinquish such branch or branches or (b) f o r f e i t a l l rights and privileges of membership and surrender i t s stock in the Federal reserve bank. "5. M State bank which has established any branches o subsequent to February 25, 1927, beyond the corporate limits of the c i t y , town, or v i l l a g e in which the parent bank i s situated may become a member of the Federal reserve system except upon relinquishment of every such branch. "6. State member banks may establish branches within the corporate limits of the c i t y , town, or v i l l a g e in which the parent bank i s situated without obtaining permission of the Federal Reserve Board." CHAIN BANKING 1. Conditions of Membership. - Prior to the enactment of the McFadden -15- X-6521 Act, the Board prescribed conditions of membership under which State banks could "be admitted to the Federal reserve system in order to e f f e c t some degree of control over chain "banking. One of the conditions with which State banks entering the Federal reserve system were required to comply, reads as follows: 1 1 (5) Such bank or trust company, except after applying for and receiving the permission of the Federal Reserve Board, shall not consolidate with or absorb or purchase the assets of any other bank or branch bank for the purpose of operating such bank or branch bank as a branch of the applying bank; nor directly or indirectly, through a f f i l i a t e d corporations or otherwise, acquire an interest in another bank in excess of 20 percent of the capital stock of such otner bank; nor directly or indirectly promote the establishment of any new bank for the purpose of acquiring such an interest in i t ; nor make any arrangement to acquire such an interest." This condition of membership was incorporated in the Board's Regulations of 1924 and was prescribed for every State bank admitted to membership between April 7, 1924 and January 3, 1928. As a result of an amend- ment to Section 9 contained in the McFadden Act (February 25, 1927) there i s some doubt whether the Board now has authority to prescribe this broad condition and, therefore i t has been unable to exercise the same degree of control over chain banking. I t has, however, prescribed the following con- dition of membership for every State bank or trust company admitted to membership since January 3, 1928. "(3) Except after applying for and receiving the permission of the Federal Reserve Board, such bc.nk or trust company shall not acquire an interest in any other bank or trust company, through the purchase of stock in such other bank or trust company." 2. Recommendations for Legislation. - As early as January 8, 1926, the Board addressed a l e t t e r to Congressman McFadden (X-4500) recommending that there be incorporated in the pending McFadden b i l l certain provisions _16- X-6521 designed to secure adequate information regarding national and State member "banks which are closely related in management, operation or interests to other banking institutions and, in particular, to afford some check upon the abuses frequently occurring from chain banking. These suggestions were not adopted by Congress, 3. Correspondence with Hon. Louis T* McFadden re Administrative Control.— Under date of my 2, 1927, Congressman McFadden addressed a l e t t e r to the Comptroller of the Currency, suggesting that he adopt administrative measures calculated to control or prevent the growth of chain banking among national banks and sent a copy of his l e t t e r to the Federal Reserve Board with the suggestion that the Board should adopt similar administrative measures with reference to State member banks of the Federal reserve system. The Board, under date of May 18, 1927 (X-4854) , replied that i t was powerless under the law to take any such action. The Board called attention to the fact that i t had suggested l e g i s l a t i o n along this line, but that Congress had not adopted i t s suggestions, and also called attention to the fact that Congress in the McFadden Act had amended the law ao as apparently to take away the Board's power to control this practice through conditions of membership# the Board*s l e t t e r concluded with the statement that the remedy l i e s with Congress• 4* Annual Reports for 1927 aid 1928. - In addition to the correspondence with Congressman McFadden above referred to, the Board has in i t s annual reports for the years 1927 and 1928 brought to the attention of Congress the fact that the expanding operations of financial companies specializing in the purchase of bank stock have presented special problems to Federal and State o f f i c i a l s charged with the responsibilities of bank supervision# I t was pointed out that such companies have been organized in increasing -17numbers ana banking as that defined in to s u p e r v i s i o n 32 of was in since or they are not d i r e c t l y Federal and S t a t e regular engaged i n statutes, the b u s i n e s s (See pages 31- The d i f f e r e n c e b e t w e e n b r a n c h a n d c h a i n b a n k i n g was p o i n t e d out that t h e more considerable chain banking have been g e n e r a l l y i n S t a t e s which p r o h i b i t lishment of b r a n c h United States pages 50-51 5. Banks o f f i c e s by banks. was a l s o of Governors and F e d e r a l of t h e for to that a - reserve the view question was of the recommended, 6. Federal further at thoughtful of it that to estabin Congress. the (See and the felt reserve their April, development should the p o s s i b l e system. that the of bank investment the banking be o b t a i n e d p l a c i n g the banking departments. that 1923, reserve Federal r e s e r v e a g e n t s were o f s u c h c o m p a n i e s make i t was s t a t e d Federal i s d e v e l o p i n g which s h o u l d be some l e g i s l a t i o n of of F e d e r a l R e s e r v e dangers a matter The incident for tte The G o v e r n o r s d i s c u s s e d to conthis Conference and w h i l e n o t h i n g d e f i n i t e question is a matter that deserves consideration. Committee the the of Federal Reserve Board and jurisdiction to S t u d y Chain B a n k i n g . and group banking development ence considered situation the bank Governors a widespread development sideration i n f o r m a t i o n of conferences of b a n k s t o c k , dangerous companies under t h e Federal The 1 9 2 7 f a l l reserve agents the a t t e n t i o n authorities with such the F e d e r a l Reserve Agents and Governors the purchase opinion brought the The c h a i n b a n k i n g s i t u a t i o n summarized f o r 1927 and 1928. companies developments of 1 9 2 3 A n n u a l R e p o r t . ) Conferences in of t h e y h a v e n o t "been s u b j e c t examination by banking a u t h o r i t i e s . 1927 Annual R e p o r t ) . explained and i t x-6521 effects - The q u e s t i o n in the United States of b a n k s t o c k of b r a n c h , with particular ownership by i n v e s t m e n t trusts chain refer- and holding -18corporations, ^as on N o v e m b e r 1 9 , a committee in this 1929, to study and other comparable with in this other c o n s i d e r e d "by t n e it the merits own), investment and the group trusts further, and holding B o a r d may b e i n p o s s e s s i o n this Important of t h e reserve 1929, of b r a n c h , this Smead of Francisco, in Canada b e i n g a p p a r e n t l y more chain banning effect system as developed b a n k i n g s y s t e m of of in order of bank that ownership corporations, the C o n f e r e n c e of the and a u t h o r i t a t i v e this and stocks by Federal Reserve information on Federal r e s e r v e bank Governors and to concur i n and e n d o r s e Council that February 27, the Board* s of "The F e d e r a l R e s e r v e B o a r d a p p o i n t the u n i t the recommendation a committee be a p p o i n t e d 1930, naming as members purpose, Governors and, to study the c h a i n and group b a n k i n g . Accordingly, on for or of a c c u r a t e agents voted Federal Advisory subject 1529, subject." The D e c e m b e r , Federal and the Council i n t h e b r a n c h "banking s y s t e m a s p r a c t i c e d (conditions country and elsewhere, countries; of Advisory Federal recommended t h a t , countries, our X-3521 staff, thereof, the Governors and F e d e r a l reserve of a letter agents advising committee Goldenweiser Fleming and o f Hew Y o r k , On t h e s a m e d a t e to appointed, a Messrs. and Messrs. Sounds, Federal reserve banks respectively. the Board Clerk, and Deputy C l e v e l a n d and San ( X - 6 5 2 0 ) *~ras a d d r e s s e d them of t h e a p p o i n t m e n t t h e above named c o m m i t t e e . F0RZIG1T BRAJCEwS 1. national banks. Federal Reserve Act establish branches (Act in N a t i o n a l b a n k s u n d e r S e c t i o n 25 of of December 23, foreign and under t h e p r o v i s i o n s - countries of t h e A c t the 1913)wore g i v e n the r i g h t or dependencies of S e p t e m b e r 7, of 1913, original to the United S t a t e s amending S e c t i o n -1925, 'banks such posessions establish of -" r ere g i v e n the power the United S t a t e s , At foreign branches pi-rsuant X-6521 to establish branches the p r e s e n t to the in insular t i m e n a t i o n a l b a n k s may provisions of S e c t i o n 25 of the Federal Heserve Act. 2. State iicFadden Act, Member B a n k s . - P r i o r State do s o . provides that the passage b a n k s w h i c h w e r e members of could e s t a b l i s h branches may n o t to in foreign countries; no S t a t e b a n k may r e t a i n lished a f t e r February 25, i n which the This Act banks 5. year since t h a t Act or a c q u i r e System they stock in a Federal of any b r a n c h 1927, beyond the limits of or branches the city, foreign class one e s t a b l i s h e d b e y o n d t h e country is A branch i n which the p a r e n t bank i s provisions; the establishment of estab- town or of a S t a t e b a n k limits l o c a t e d and thus of b r a n c h e s w h i c h a r e p r o h i b i t e d b y expressly excepts from i t s branches Federal Reserve situated. town or v i l l a g e within but so-called the p a r e n t bank is established in a city, the the T h i s A c t amended S e c t i o n 9 of t h e F e d e r a l R e s e r v e Act a n d r e s e r v e bank except upon r e l i n q u i s h m e n t village of of the comes t h e McFadden A c t . foreign branches by national b u t no such e x c e p t i o n i s made i n f a v o r of of S t a t e member b a n k s . Annual R e n o r t s 1927, p. 46, for foreign branches. oat that for a and the Board i s "it is when i t obvious that the Section situation Congress amended S e c t i o n 9, discrimination against of In i t s Annual E e o o r t 9 of t o p e r m i t S t a t e member b a n k s The B o a r d e x p l a i n e d t h e domestic branches", tification - the Board recommended t h a t Reserve Act be amended so as and p o i n t e d 1927 a n d 1928. opinion that the as the to set intended and s t a t e d S t a t e member b a n k s for Federal establish f o r t h above to deal 11 the there in is this -1 th no j u s respect; law s h o u l d be amended a s soon a s -20possible result its so as t o remove 4. Vice the p o s s i b i l i t y i n such discrirnination." A n n u a l Hep o r t f o r A c t i v e Ste-ps Governor P i a t t the year 1928, addressed letters Drafts appreciate favorable action On May 1 0 , 1929, the Morbeck, lishment similar 25 of of to the S. lish such as A similar both these proposed t h a t upon f u r t h e r State member b a n k that (S. 3oardTs the H the Board date." an e a r l y 1070) t o amend member b a n k s to conclusion establish A revised draft that of the and that it the Board r e c u e s t e d the surplus conditions of banks d e s i r i n g of $1,000,000 and McFadden on t h e that estab- Section be i n t r o d u c e d i n as might be p r e s c r i b e d by t o Mr. matter t h e amendment was s u b - Federal Reserve Board, was s e n t of t h e the provisions of Senator to establish o n l y on t e r m s a n d f o r n a t i o n a l banks by a n d i t was s u g g e s t e d to consideration member b a n k s should be p e r m i t t e d to have a c a p i t a l letter letters State amendment a t to permit S t a t e and the Senate the Board addressed a l e t t e r to permit and r e g u l a t i o n s Board. of was s t a t e d r e v i s e d d r a f t would r e q u i r e S t a t e the p e r m i s s i o n conditions and i t the Board had r e a c h e d the foreign branches of as s t a t e d letter This reviewing the on t h i s 1929, Federal Reserve Act. 1070. to o b t a i n vr those p r e s c r i b e d this Chairmefc to the 1929, foreign countries. such branches mitted with of in law s o foreign branches, of A p r i l 2 5 , S e n a t o r ITorbeck i n t r o d u c e d a b i l l of J u n e 1 0 , i n which i t of a m e n d i n g t h e recommendation i n of amendments c o n f o r m i n g t o F e d e r a l Reserve Act and o n e r a t e branches Under d a t e this to 41. enclosed *rith these l e t t e r s S e c t i o n 9 of "being c o n s t r u e d s o a s to Obtain L e g i s l a t i o n . - Under date foreign branch situation. will of i t The B o a r d r e n e w e d House B a n k i n g and C u r r e n c y C o m m i t t e e s , views were X-6521 c* to the lieu to e s t a b or more, comply "Tith Federal Reserve same d a y a n d i n f a v o r a b l e a c t i o n be t a k e n on *-21- X-6521 the amendment. Under date of September 10, 1929, letters were again addressed to t&f Chairmen of the Senate and House Banking and Currency Committees, calling their attention to the previous recommendations of the Board and renewing the recommendation that b i l l s conforming to the Board's suggestions be introduced and passed by Congress. On December 11, 1929, Senator DTorbeck introduced a b i l l (S-2605) in the Senate in the form in which i t was recommended by the Board and this b i l l was reported out without amendment on December 18 by the Senate Banking and Currency Committee. On February S, 1930, the Board voted again to recommend the enactment of this amendment in i t s Annual Report for the year 1929, I t was also voted to send a l e t t e r to Mr. McFadden asking him to introduce the amendment in the House. This l e t t e r has been prepared but has not yet been mailed. ARTICLES I IT T E BULLETIN. H In the Federal Reserve Bulletin for December, 1924 (pages 925-940) there i s an excellent a r t i c l e on the modern development of branch banking in the United States, which contains a review of the Board's recommendations , regulations, and administrative policies on that subject and much valuable s t a t i s t i c a l material. This i s supplemented by a r t i c l e s appearing in the following numbers of the Federal Reserve Bulletin at the places indicated. June, 1926, pages 401-408 May, 1927, pages 315-318 December, 1929, pages 762-770 The l a s t of these articles contains valuable s t a t i s t i c s regarding chain banking. Digitized for WW:vdb FRASER Respectfully, Walter Wyatt, Gene ral Couns e1.
@FedFRASER