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Washington, D. C,,
December 3rd, 1914.
The Examination and Audit of Federal Reserve and Member
Banks under the direction of the Federal Reserve Board.
There has been created a Division of Audit and Examination.
As an outline of its duties the following is submitted for
the information of all concerned;
♦
EXAMINATION AND AUDIT OF'FEDERAL RESERVE BANKS.
(a)
(a)
Federal reserve banks.
(b)
Books and accounts of Federal reserve agents.
Federal Reserve Banks.
Sec. 11; Par A - Authorizes and empowers the Federal
Reserve Board "To examine at its discretion the
accounts, books and affaire of each Federal Reserve
Bank."
Sec. 21; Par. 5 - Provides that the "Federal Reserve
Board shall, at least once each year, order an exam
ination of each Federal reserve bank, and upon joint
application of ten member banks the Federal Reserve
Board shall order a special examination and report
of the condition of any Federal reserve bank."
The law provides for an examination of each Federal
reserve bank at least once a year, but it is proposed
that examinations shall be held ordinarily twice each
year, covering a thorough investigation of rediscounts,
collateral loans, investments and open-market transactions,
particular attention being paid to compliance with the
provisions of the Federal Reserve Act and regulations
promulgated by the Federal Reserve Board.
Paper accepted for rediscount should be analyzed, in
order to determine its eligibility under the regulations
iseued..
Inquiry should also be made. as to the condition
of member beaks of feeing, panel' for r.edisctgtpt*
Every
examination shpiuld cover a complete audit f t the .Jjank ahd
a report made to the Federal Reserve Board &® to the oon»
dition of eaoh.banjc, competency at management, adequacy
of records and attention given by the director® to the
affaire of the reserve bank.
Attention should be called
to any unsafe or unsound condition, or any vicious tendency
that might appear in any department of the bank.
(b)
Federal Reserve Agent.
Section. 11 j Par 1 - The FederajC Reserve Board shall
be authorised Mto require bonds of Federal reserve
agents, to make regulations for the safeguarding of
all collateral, bonds* Federal reserve notes, money
or property of any kind deposited in the hands of
such agents, * * * and make all rules and regulations
necessary to enable said board effectively to perform
■ the same.**
The records and accounts of the Federal reserve agent
in each Federal reserve district shall be examined at least
quarterly, and a complete report made to the Federal Reserve
Board.
The examination shall cover a verification of the
money, Federal reserve notes and collateral in the hahde
of the Federal reserve agent*
SPECIAL EXAMINATIONS OF OlfBER BANKS OR BANKS APPLYING FOR
BdBMBBRSHIP.
(a )
Msafear
•
Sec. 11; Par, A - The Federal Reserve Board shall be
authorised "to examine' at its discretion the. accounts,
books and affairs of each Federal reserve bank and of
each member bank."
n't
ii
It- is twcpactcd that the exercise of t h f u n c t i e j r u i V f
be confined to special examinations ot investigation's
b«
made only tvheu deemed necessary by the Federal Xba^rve Board,
or with the apprs^al of the Board upon a request by any
Federal roscrv^ banfc^
The primary purpose p f such •examina
tion should be to ascertain the condition of a member banfc
or of the linos of credit which are being extended by it.
The Federal Reserve Act also grants authority te tho
Comptroller of the Currency and to the Federal reserve banks
the right to examine member banks'.
Therefore, in order to
prevent confusion and secure co-operation and coordination
with the examinations of National banks ky the examiners
on tho staff of the Comptroller of the Currency and in
order to avoid duplication in examinations a plan has been
suggested, details of which are ombodied in the report of a
special committee on this subject appointed by the Comptroller
acting with a committee of your Beard to suggest a means
of standardizing the salaries of National bank examiners
and the method of assessing banks for the cost of such
examinations.
A copy of that portion of the report relat
ing to the matter above referred to is attached to this
memorandum.
(B)
State Institutions Applying for Membership.
Sec. 9; Par. 2.- "The Organization-Committee or the
Federal Reserve Board shall establish by-laws for the
general government of its conduct in acting upon
applications made by the State banks and banking
associations and trust companies for stock ownership
in Federal reserve banka.. Such by-laws shall
require applying banks * * * to submit to th£
examination ap4 regulations proscribed by tb/
Organization Committee or by the Federal Reserve
Board*" *
The examinations of such institutions shal3- P&
made when ordered by the Federal Reserve Board.
I-1* Is
recommended, however, that all such applications shall
be referred to the Division of Audit and Examination,
which shall communicate with the Reserve bank of the
District and with the State banking authorities.
In
connection with this inquiry, the Division of Audit and
Examination shall be authorized to call for such supple
mental information as may be deemed necessary, for ex
ample, the fo-llowing:
(1) A copy of report of the last examination by
State authorities;
(2 ) Loans ever a stated amount;
(3 ) Real estate investments, loans secured by real
estate collateral, loans secured by stock of
real estate corporations, real estate mortgages
with data as to maturities;
(4 ) . The business, firm and corporation affiliations
of officers and directors;
(5) A de ailed statement of investments.
(C)
Special Examinations - State Banks and Trust Company
'•
Members *
Sec, 21; Par. 1.- The Federal Reserve Board "may
authorize examination by the State authorities to
be accepted in the case of State banks and trust
companies and may at any time direct the folding
of a special examination of State banks or trust
companies that are stockholders in any Federal Re
serve Bank."
The intent of the law seems to be to accept'd the
examination made by State authorities wherever it can bo
5
d<tiG without discrimination.
Vt should therefore be a
function 'Of this Division fee investigate the examining
methods *>f State authorities^ \n order to ascertain
whether or not the standard of examinations is such
as to be acceptable to the Federal Reserve Board.
It will be necessary to request State authorities
to furnish'the Federal reserve banks information as to
the condition of each State institution that is a member
of the Federal Reserve System*
Whenever a special ex
amination is necessary by either the Federal Reserve
Board or a Federal reserve bank it is usually desirable
that such examination should be made in connection with
an examination made by State authorities,
3.
SPECIAL INVESTIGATIONS,
Special investigations will be held only when deemed
advisable or order oy the Reserve Board, either when
warranted by general business or other conditions.
Applica
tions for the establishment of domestic or foreign branches, t
or of member banks to exercise trust company powers shall
be investigated by this Division.
4.
CREDIT BUREAUS.
•The establishment of credit bureaus in Federal re
serve banks, and of a central credit bureau at Washing
ton is so closely related to examinations, that it is
desirable that the Division of Audit and Examination
8 u
shail be_ responsible firr the dayfi^pm^mt of thp system.
#
The purpose
the credit bureau is io collect and r#eor$
data concerning member banks and the standing bf in
dividuals,
firms and corporations discounting at and
borrowing from these banks, or selling paper to them*
Furthermore, it is very desirable that ccbd.it bureaus
be established in each Federal reserve bank, under the
joint supervision of the Federal Reserve Agent and the
Governor of the Bank, in order that material may be
there collected, recorded and indexed for the benefit
of the board of directors er Executive Committee passing
upon the paper offered for rediscount, and open for
inspection by examiners of the Federal Reserve Board.
Under the accounting system which has been adopted
reports of various leans made are reported daily to the
Washington office.
It is proposed a few months hence
to require a further weekly report giving the aggregate
liability of the makers or payers of the paper redis%
counted.
This data will then be analyzed at the Wash
ington office and reoommendations made which will assist
the credit bureaus of the different districts.
It will
be necessary to establish a system of co-operation and
interchange of information between the district credit
bureaus and also establish co-operation between National
bank examiners^ and ths Federal reserve banks in each
district,.
This subject is more fully covered in the
-7 -
a
report of the committee of examiners to the Comptroller
and the Federal Reserve Board, to which reference is
- now made.
5.
REPORTS AND STATEMENTS.
Various detailed and periodical reports are
for
warded to the Federal Reserve Board by the reserve
banks.
•
Information as to rediscounts and loans is
received daily and the figures recorded on the records
of the Division of Reports and Statistics. . Loan re- .
ports will require careful analysis.
The work of the
Division of Reports and Statistics and that of the Division of
Audit
and Examination are
30
closely related that it
is esential that close cooperation shall exist between •
the two,
6.
AUDIT.
The Board will determine later whether it will in
clude under the Division of Audit and Examination a De
partment for audit of bills for its own purchase of ma
terial, or disbursements.
Staff of the Division of Audit and Examination.
The Board does not contemplate making general examina
tions until January, 1915.
The number of men who will be
required on this work will depend entirely upon the extent
of the special examinations and investigations demanded,
and it is expected''fto draw upon
staff of the Comptroller
of the Currency for assistance in these examinations.
Fsuj- the rcvttipn vitrlc of fxstmih&tion, three to four Federal
reserve examiners aiqd say twg ^ssletant examihers will be neces
sary. An Auditing clerk will Jj>e required to pass upon the bills
for di shut's sgnont j a report olerk to analyze the reports made by
the Federal reserve banks and record loan data bn the Credit
Bureau records will be needed. At least one stenographer will
be required for the use of the Division,
Submitted to the Board
On Behalf of the Committee on
Audit and Examination,
Adopted by the Federal Reserve Board
December 18, 1S14.
8 '*
'O*
m
..
m m U M A T I O i'T €f MEMBER BARKS.
1*
Section 11, par; *
11«
Section
par.l
111.
Section 21, par .3.
>
-J
y
The Federal Reserve Board shall
be auth*risfi&{
(a) "T»examA»fe at its discretion
the accoorFfs, books, and affairs
of each federal Reserve Bank and
of each member bank."
provides that "The Comptroller of
the Currency, with the approval of
the Secretary of the Treasury, shall
appoint examiners who shall examine
every member bank at least twice in
each calendar year and oftener if con
sidered necessary. The Federal Reserve
Baord may authorize examination by
State authorities to be accepted in
case of State Banks and Trust Companies.11
provides that "in addition to the exam
ination made and conducted by the Comp
troller of the Currency, every Federal
Reserve Bank may, with the approval of
the Federal Reserve Agent or the Federal
Reserve Board provide for special exam
ination of member banks within its dis
trict. * * * Such examinations shall be_
30 conducted as to inform the Federal R e
serve Bank of the condition of its member
banks and of the lines of credit which awbeing extended' by thorn."
The lav; requires that two examinations of every member bank
shall bo made in each calendar year by examiners appointed by the Comp
troller of the Currency.
An exception is made, however, .•* State Banks
and Trust Companies where the Federal Reserve Board has authorized the
acceptance of examinations by State
authorities.
It will be seen fur
ther that the Federal Reserve Act gives to the Federal Reserve Board
the power to examine each member bank, and also that each Federal Re-serve Bank has the pov.’er to examine its merdbei
.banks.
At present many banks ..rpplement Federal or State examination by
independent examinations by clearing house examiners, public accountants
or directors.
State institutions are,examined by St^te bank examiners
and under the laws of some States compulsory examinations by directors
are also required.
If advantage is taken of the right to examine member banks, by all
of the authorities upon whom the power is conferred, it will place mem
ber banks under continuous examination, at a tremendous expense, cause
%
duplication and confusion, and defett the purpose which the law is in
tended to serve« The lav; contemplates not an increase in examinations
but rather an increase in the effectiveness of examinations in both city
and country districts.
SUGGESTIONS AS TO EXAMINATIONS *• MEMBER BANKS.
(a)
national Bank Examinations -
1
It is plainly the intent of the lav; that all
regular examinations of member banks shall be made by
national bank examiners. The Act permits theFederal Reserve Board to accept examinations by Stateauthorities as to State banks and trust companies ad
mitted to the Federal Reserve System.
The primary purposes of all examinations axe to
ascertain that the institutions are solvent, that
business is beiny conducted in accordance with the
law, and to correct unsafe and unsound tendencies.
|
(b)
Federal Reserve Bank Examinations.
The primary purpose of such examinations is to "inform
the_Federal Reserve bank of the condition »f its member banks
and of the lines of credit which are being extended by them".
In order tc determine the line of rediscount which may be
safely and wisely extended, the Federal reserve bank in each
district wi’l be interested in obtaining detailed information
concerning each member bank, as to financial condition, char
acter of management, competency of officers and directors, care
exercised in granting and checking credits, customs in extending
accomodation to directors and officers, or to corporations which
they may own, control or be interested in, and relations with
large boi-srV.ers.
The necessary information could be obtained by the national
bank examiners in connection with the regular examination.
If
the plan of co-operation is approved, it is suggested that the
Federal Reserve Agent be furnished with 1.
Record of loans over a stated amount as shown at each
examination in order that the data may be recorded
on the Credit Bureau records and made available for
future reference.
2.
Such other information as may be desired by the Federal
Reserve bank.
3.
Copies of the reports of examinations of member banks,
upon request made to the Supervising National Bank
Fxaminer of the districtThese copies to be later
returned to the Supervising Examiner.
Under the proposed plan »f co-operation between the Federal
reserve banks and the National Bank Examination system information
will be obtained by xhe examiners for the use of each Federal re
serve bank. On.the other hand, the records will be available to
the examiners for use at subsequent examinations.
Each bank will
have a record of the business, firm and corporation affiliations
of directors and officers of each member bank; credit informa
tion concerning member banks and the standing of borrowers, and
record of failures and bankruptcies.
The loan lists, after being
recorded on Credit Bureau records will be returned for use at
following examinations.
If a 'special examination by an examiner appointed by a Federal
reserve bank, is thought to be necessary, it should be made, when
ever possible, in connection with the regular examination made by
national or State examiners, but under nt circumstances without the
approval of the Federal Reserve Board.
(c )
F e d e ra l Reserve Board -
exam ination of menber banks,.
The exercise of this function should be confined to special
examinations or investigations, to be made when and as deemed ne
cessary by the Federal Reserve Board, or with the approval of
the Board upon a request made by any Federal reserve bank. It
will frequently be desirable to have the examination made by nat
ional bank examihers acting under assignment or instructions from
the Comptroller of the Currency in cooperation with the Federal
Reserve Board.
EXPENSES OF EXAMINATION.
Federal Reserve Board Examinations.
Section 10 of the Federal Reserve Act provided that “The
Federal Reserve Board shall have power to levy semi-annually
upon the Federal reserve banks, in proportion to their capital
stock and surplus, an assessment sufficient to pay its estimated
erqpenses and the salaries' of its members and employees”.
It is apparent that the expenses of examinations made by
direction of the Federal Reserve Board must be provided for in
the semi-annuall/assessraent above referred to.
In connection
with the preliminary examination of State institutions seeking
admission, it may be possible to charge the institutions in
vestigates the actual expenses incurred.
December 3, 19*4-
@FedFRASER